Credit Tips: Part 3
Once Upon A Time... continued
That sounds like a good way to start a story ~ Let's call it your Credit Story.
There are 5 Major Factors that Make Up a Credit Score:
- Payment History
- Credit Usage
- Credit Age
- Mix of Credit
Keep in mind, that Credit doesn't make a lot of sense. If you remember that, try not to argue and shake your head often, you'll be way ahead of the game. :-)
Let's continue with #2, Credit Usage
- Credit Usage, also known as credit utilization, is the ratio between the total debt you owe and your total credit limit on revolving accounts. It's best to keep your "credit usage" below 30%.
- Example; My Home Depot Card allows me to spend $3,000 and my Visa allows me $6,000 MAX. Those 2 cards total $9,000 if they are maxed out. The credit usage guidelines say I shouldn't spend more that 30% of that total. ($9,000 x 30% = $2,700)
Read it again. Keep unused cards OPEN. Closing the account reduces your total available credit. I have found that if your card is at a 0 balance for a year or so, the creditor will likely close the account themselves. That is better that YOU closing your own card. Why? See explanation above of why credit doesn't make sense. LOL
There are many, many different things that go into a credit score. We'll continue to explore the 5 biggest influences on your number. I often refer to credit like sneaking out of the house when you were a teenager. Your parents somewhat trusted you until you snuck out, past curfew without their knowledge or permission. You got caught. Now you have to earn that trust back - Whew! Not an easy task. It only takes a few mistakes to screw up your credit ~ but it takes a really long time to get it back!
The higher your credit score, the lower the risk of you defaulting. In many cases that means lower interest rates, faster approval and less paperwork! If you think your credit score only matters when you buy a home, you're wrong! Check out this article from Value Penguin on insurance rates.
In case you missed it: