Opinions on credit cards vary greatly. Some prefer not to have any credit cards at all, others prefer to pay off the balance in full each month and rack up the points, and still others fall somewhere in between. In the past few months, however, some of our resources may have been limited leaving credit as the only alternative. How can we navigate credit during this global pandemic? Let’s look at a few credit card fundamentals that will help you to make the best decision for you. These are all the factors that make up your credit score.
Payment History (35%)
This shows how often you’ve paid your credit accounts on time. This helps the lender to know the if a borrower is reliable. “On Time” means no later than 29 days after the due date. So, no need to panic if you are just a few days late paying your bill. A late fee will be added to your account but often you can call to get the fee removed. However, once your account hits 30 days late, a late payment is posted on your credit report and can remain for up to 7 years. Yes, you read that correctly, 7 whole years. Tip: Stay organized. Make a list of all your due dates so that you don’t accidentally hit the 30-day mark. Add the dates to your phone or calendar. Once a late fee is added to your credit report it is difficult to remove and sometimes impossible.
Amount Owed (30%)
This also known as credit utilization ratio. It’s calculated by dividing how much you owe divided by the total credit you have available. For example, if your credit card has a $5,000 limit and you owe $1,500, your utilization ratio is 30%. That is considered good. Anything under 30% is considered good. When creditors notice that you are using most of the credit you have available, they get worried that you are running out of cash. Tip: If you’re not able to pay your balances down but have a good relationship with the bank or credit card company you can ask for a credit increase. That is one way to lower your ratio without paying large sums of cash. Just be careful not to spend that additional available credit!
Length of Credit History (15%)
This is simply the length of time you’ve had credit. It’s the average of the oldest credit account to the newest. An average of 5 years or more is considered good. That can help you make a decision of whether to add new credit or delete an old credit account.
Credit Mix (10%)
Your credit score considers your variety of credit from installment loans (like a car note), to credit cards, and a mortgage. Since this is a smaller percentage it’s not worth taking out additional types of debt just for the sake of having a variety. In fact, taking additional credit accounts will temporarily affect your credit score in a negative way. Every credit application is known as a hard pull on your credit and will lower your score by a few points.
New Credit (10%)
As mentioned above, new credit is when you open a new credit account. Opening many new accounts at once has a negative impact on your overall score.
Now that we’ve discussed all the factors that make up a good score, what is a good score? A credit score ranges from 300 – 850. Lower than 580 is poor, 580 –669 is Fair, 670 –739 is Good, 740 –799 is Very Good and over 800 is excellent.
To help make good decisions, get a copy of your credit report for free at www.annualcreditreport.com. Please note: this is the only authorized source for a free credit report from all credit reporting agencies. You can also get a copy of your credit score. Then with the information above you can understand what is impacting your credit score and how to proceed going forward. You now have to power to make the best financial decisions for your own circumstances. But what if your credit score is not where you would like it to be? How can bad credit be repaired? We’ll talk about that in the next article.
Until Next Time,
Crystal
Crystal Hicks is an accountant with well over a decade of experience in tax, finance, audit and accounting in New York and Florida. Each week in Money Talks, she’ll share her advice to help individuals to navigate their financial challenges!
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