Credit (Good or Bad?)

Credit Cards

  • Credit cards are convenient and beneficial if a person uses them wisely. The following guidelines explain how to use credit cards and how not to.

 

  • Pay your credit card bill off in full every month. If you cannot do that, stop using it until you can. If that is not possible, cut it up! Paying interest on a credit card is for chumps and it will cost you dearly.

 

  • Set your credit card payment up as an automatic payment each month out of your online banking account. Get organized.

 

  • If you are not an organized person, stay away from credit cards. You cannot afford to miss a payment, be late for a payment or go over your credit limit. You will pay through the nose for these mistakes.

 

  • Have one primary credit card and one backup that you keep in a safe place for emergencies. Avoid all other credit cards. Two is all you need.

 

  • Avoid store credit cards even when they offer discounts. They pull you in with teasers and fleece you over long periods of time. There is a reason why they push these so hard. Just say NO.

 

  • Never use a credit card in an ATM machine. This will be identified as a cash advance and the interest rate will be exorbitant. The credit card company wins and YOU lose!

 

  • Never use cash advance checks. The interest rate will be astronomical and once again, the credit card company wins and YOU lose!

 

  • Read your benefits brochure carefully. There are many advantages to owning and using a credit card wisely. Learn about them and use all of the benefits they provide you. That stupid piece of plastic is not evil. It comes down to you. Take control of your credit.

Your Credit

  • Go to annualcreditreport.com to review your 3 credit reports (Experian, TransUnion, and Equifax). Federal law states you will be provided this opportunity one time per year at no cost. Be careful and avoid the sites that try to get you to pay. Review your report for mistakes and outdated information. Any information older than 7 years must be removed. The exception to this rule is Chapters 7, 11, and 12 bankruptcies, which must be removed after 10 years.

 

  • Here are some guidelines. If you are below 600, you have a problem. If you get a loan, the interest rate will be high. If you have a number between 600-720 you are doing okay, but nobody at the bank is going to jump up and down when they meet you. If you are between 720 and 760 you will probably get a warm smile and handshake with your loan. If you fall above 760 they will roll out the red carpet, and provide you with caviar and champagne. If you are above 800 they will probably ask you for a loan!

 

How to improve your credit score

  • Payment History: PAY YOUR BILLS ON TIME. This is not complicated. You either pay on time or you don’t. If you do, your credit score will go up, if you don’t, it will go down.

 

  • Credit Utilization: The bank wants to see you with a nice cushion between what credit you have access to and how much you actually use. They would prefer you to use less than 30%. I would prefer you use less than 10%.

 

  • Credit Card (how not to do it): Your credit limit is $10,000. On the day they check your balance you owe $6,500. This means you are utilizing 65% of your available credit. It does not matter if you were making minimum payments on that credit card at the time or if you were going to pay it off in full. 65% is too high and your credit score will be negatively affected.

 

  • Credit Card (how to do it): Your credit limit is $10,000 and the day they check your balance you owe $2,000. Now you are utilizing 20% of your credit limit and your credit score goes up. Let’s take a look.

Credit Limit

4 Different Credit Card Limits

Amount You Owe on Specific Day

Card Limits

Bad Idea

Good Idea

$10,000 (Visa)

$2,788

$1,688

$12,000 (MasterCard)

$8,450

$1,220

$3,000 (Store Card)

$1,800

$0

$2,500 (Store Card)

$2,200

$0

$27,500 (Total)

$15,238 (55%)

$2,908 (10.57%)

 

  • Length of Credit History: Having a home loan for many years will help. Having the same credit card for 10 years will help. These issues are important, but not as important as the first two points.

 

  • Types of Credit Used: You will receive a plus for having multiple types of credit. Having a mortgage and a couple of credit cards will enhance your credit score.

 

  • Recent Searches: If you apply for many different types of credit, it will affect your credit score in a negative way.

 

  • Late payments, negative accounts and collections, garnishments, bankruptcies, and liens: None of these are good. Make sure that what is on your report is absolutely correct and if it is, get rid of it when they reach the 7 or 10 year thresholds. Do not count on the credit bureaus to do it for you. Take control of your credit. It is YOUR credit.