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.

So you’re living paycheck to paycheck and you really need a credit card to help with all those little emergencies that can arise. But maybe your credit record got into a bit of trouble in the past and now you’re left adrift in a sea of helplessness. There are people out there who want to help you get back on your feet — people other than Joe the Used Car Salesman.

The first thing you need to embrace is a change of thinking. Emergency funds are the absolute best answer for emergencies. Credit cards are only for emergencies when there is no emergency funds and small purchases, like gas, that you pay off in full at the end of each month. While credit cards can get you into trouble if you don’t change your spending habits, it is true that the lack of a credit card to build up your credit rating can make it nearly impossible to buy a car, a house, get a decent rate on car insurance, and even, in some cases, rent an apartment.

So how do you get the almighty credit card if you don’t have any credit? Start with a retail store credit card, which is absolutely ridiculous because this is usually far from “necessary purchases” and it becomes very easy to get carried away. It’s the psychology of shopping — it is easier to buy more with painless spending (meaning you don’t see money leaving your hand, so there’s no emotion involved). Nevertheless, retail stores are, unfortunately, the most lenient with their credit policies. These are usually low-limit, high-interest cards that can serve as the foundation for the future of your credit.

Talk to your bank. Of course, banks are not the most generous of all lenders right now. They made too many stupid loans to too many high-risk borrowers and now they are reaping their rewards, which they are passing on to you, the consumer. You want credit at the bank? The waiting line is growing as fast as the denials.

Get a secured card. This will require you to put money into an account, which you can then access with your credit. It’s kind of like using a gift card that you bought for yourself, except it boosts your credit rating.

So those are some ideas to get you started on the road to a bigger and better credit rating. It can seem like a financial juggling act at times, but building up your credit is a worthwhile task in our credit-centered society.

The fact is, we live in a credit-oriented society. Even if you loathe credit cards and never want to see one again, you really need them if you ever plan to finance a major purchase like a house, car, higher education, etc. You should have at least one credit card, use it for gas or grocery purchases, then pay it off each month. It’s essential to your financial well-being.

Without maintaining at least one loan, your credit rating goes down the toilet because there is nothing by which a lender can judge your fiscal responsibility and accountability. The easiest loan to obtain and maintain is a credit card, even if it’s a small, low-limit student card or retail card. Sometimes a person reaches a point in their life where they do want to buy a house, but have zero credit rating. It’s simply a thing they never thought about, often because they never had to. This is most common among young professionals, as well as widows or widowers whose late spouse may have been the only name on the couple’s credit cards and loans. If you are in this position, don’t despair — it’s not too late!

As aforementioned, it is relatively easy to build up your credit rating with credit cards. You can start with a retail card. These type of cards are more readily approved and have a low limit, so it is slightly less difficult to get in trouble. The bottom line is to pay off your credit cards each month! Then, when you take care of the small things, bigger things like home financing will be no hurdle at all.