Credit Card Debt Management

Your credit score is immensely important, not only in your finances, but in life. Insurance costs, job prospects, and homeownership are all affected by this three-digit number. Determined by the Fair Isaac Corporation, thus the name FICO, your credit score has tremendous power over your life.

This is why it’s quite important to understand what makes up your credit score and how you can control it. As the pie chart shows, your credit score is roughly 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit.

1. Payment History

This is fairly self-explanatory — pay your bills on time, every time. Why? Delinquent payments can stay on your credit report up to seven years. If you have problem paying a bill, talk to the lender and update them on how much you can pay and when it will be available. One important note here is that, while everyday bills like utilities won’t go on your credit report, a late payment on one of these can increase your credit card interest rate (i.e., the monthly amount you must pay). Then, you risk falling behind on the credit card payments and your credit report can become marred.

2. Amounts Owed

This category takes into account not only what you owe currently, but what you could possibly owe in the future if you were to max out all your available lines of credit. Essentially, lenders want to know how much you could borrow from all lenders combined, and whether you would be financially able to pay it all back. This speaks directly to your level of risk as a borrower. One solution is to close lines of credit that are paid off and sitting unused, but only if they are newer accounts from within the last three years or so.

3. Length of Credit History

Lenders like to see an established history of not just having credit cards or loans, but having the same accounts with the same lenders over several years. This is why, if you have lines of credit that are paid off and sitting unused, but have been with you quite a while, you should consider keeping them open. Instead of closing it, ask the lender to reduce the available balance to the minimum, then cut up the card and stop using it.

4. New Credit

Try to limit the amount of new credit accounts you open within a short period of time. Also, try to contain credit inquiries (i.e., credit checks run on you for the purpose of obtaining a loan) within a short time period. If you’re shopping for a car or home loan, lenders are going to be checking your credit report a lot. It is gentler on your credit report to get this all out of the way within a couple weeks, as opposed to a couple months.

5. Types of Credit

Revolving credit, like credit cards, should ideally appear on your credit report alongside installment loans, as in a mortgage or car loan. This shows lenders your level of responsibility in handling a variety of debt.

Also, don’t forget to check your credit report often. The best way to get started is to visit AnnualCreditReport.com. A credit check can help correct any reporting errors, as well as identify weak spots in your report and how they might be strengthened.

It’s a known fact that expense accounts can spiral out of control. This is as much true for government employees as for corporate employees, judging by recent news that federal workers were caught charging lingerie, online dating services, iPods and other superfluous items to government credit cards. In the current economy, few organizations can really afford extravagant spending in the name of client relations, let alone any stray personal items that may fall outside the bounds of company-approved purchases.

MasterCard has an answer. The inControl credit card will enable supervisors to set a spending limit and the time parameters within which spending can occur, list which hotels and restaurants fall under the umbrella of acceptable spending, and even receive real-time updates by e-mail or text message regarding what purchases are made with a particular card. It really is a remarkable service.

“It will help reduce maverick spending, improve compliance with corporate policies, and simplify accounting,” Steve Abrams, MasterCard’s global head of commercial payments, told BusinessWeek earlier this month.

Undoubtedly, the launch of this new product — offered in conjunction with Orbiscom technology and the Royal Bank of Scotland — will forever change the way business is done. Maybe Uncle Sam should sit up and take notice.

No more pins and needles. Your life will be a lot less worrisome if you have already been practicing good money management habits, like paying bills on time and spreading debt around without overextending your debt-to-credit ratio. Fair Isaac Corp., that baffling company responsible for the FICO score, is adding a little bit of leniency into the system it uses to determine a person’s credit score. Here are some of the most significant changes, according to Money magazine:

Isolated late payments are less damaging: Any time you make a habit of paying bills late, it’s going to be ugly. However, if you’ve done that only once or twice a while ago, but are in good standing otherwise and have a lengthy credit history (10+ years), you’ll probably be in the clear. “In fact, you could see a one-time boost in your score with the new formula,” Walecia Konrad writes in Money.

Multiple credit inquiries are less damaging: Within a 45-day window, you can undergo several credit inquiries with little or no effect on your credit report. “The change is a reflection of the fact that the average person has more credit accounts and loans today than in the past,” Konrad writes.

Multiple debts? No problem: Rather than determining how many accounts you have, what will be more significant to your credit score is how close those accounts are to being maxed out. Accounts that are nearly maxed out will drop your score by several points, but successfully managing (and not maxing out) a mixed bag of loans and lines of credit will boost your score. Therefore, Konrad recommends spreading debt over several credit cards to keep debt-to-credit ratio down.

At the risk of appearing overly suspicious, are these changes a subtle way to try to boost the economy and lenders’ profits? At any rate, no complaints here. It will be nice to see that late payment on the Kohl’s credit card from 2003 finally drop off the credit report!