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Credit Cards May Help and Hurt Your Credit Score

Our economy ebbs and flows. There are years, and sometimes decades, when everything comes up roses. Then are other years when there are more weeds than anything else.

As a single mom, your finances are just a bit more important than if there are two people supporting your family, two people who can get jobs and two people who can rely on each other.

Every time you do anything, there are consequences. If you forgo exercising you’re making a dent in your health. If you don’t clean up after the kids, you’ll lose toys and clothes. If you use your credit card, you may end up in more debt than you can swim out of in years.

July21PanicI know.

When my ex and I split up it was mid-2007. My business was flourishing and I was focused. And then, the economy crashed and so did I.

Within 5 years I had more debt – mostly credit card – than I had ever had, ever hoped to have and thought I could dig myself out of anytime in the near future.

Money was going out on necessities – like food, mortgage and utilities – but not enough was coming in. I’ve always been frugal, but in these very lean years I learned a new definition of frugal.

And I learned how credit cards could both positively and negatively impact my credit score.

Your credit score is VERY important to your future, your buying power and your financial stability.

Each time you apply for a loan to purchase a car, put down a security deposit on an apartment, get a new credit card – your interest rates are determined by your credit score.

You credit score is supposed to demonstrate your credit worthiness to your lender. In other words, how likely are you to repay the loan on time?

Insurance companies use your score to factor you premiums. Cell phone companies and utility companies may use the score to determine if you need to put down a security deposit, or how much interest is charged on any overdue money.

Your credit score is used for just about everything involving money in your life.

Your score doesn’t have to be a mystery.

Several factors impact your score – from your utilities and lenders payment history (such as credit cards, apartments, mortgages and cell phone companies) to the difference between your assets and debts.

The last one is how you can either positively or negatively impact your credit score with your credit cards.

Let’s start with the negatives and end on a positive note.

How Your Credit Score Causes Problems

The first reason is logical – late payments. Falling behind on your credit card payments is a sure fire way to drop July21Stopyour credit score like a lead balloon, especially if you do it consistently.

What you might not know is many credit card companies may charge you a fee for being a couple of days late, but they don’t report your late payment until you’re 30 days overdue. Check with your card company to be sure.

Maxing out your credit can put a real dent in your credit score and for reasons you may not have considered. Your score is determined based on the amount of credit you have available compared to the amount of credit you’re using, or credit utilization ratio. By maxing out a card you reduce the amount of credit available to almost nothing.

Closing your credit card. This is another way you reduce the amount of available credit you have in your name. If your card has a large limit it can make a HUGE dent in your credit score. Maxing out credit usually happens slowly so your score adjusts, albeit in a negative direction. But, closing your large limit card suddenly drops the available credit.

Credit inquiries are another way you get a ding to your score. Anytime you apply for a new credit card or loan the bank reviews your credit. This can cause your score to drop a little. However, if your score is low, a little drop can mean a lot.

 

Credit Cards May Improve Your Score

History. When my oldest son was applying for his first car loan they gave him a higher interest rate because he didn’t have a history of making payments on time. They advised him to get a credit card, charge something small every month and pay it off. After 12 months of a good payment history they reduced the interest rate on the loan.

Different types of credit. Your score is also based on the variety of credit you hold. If all your accounts are from lenders – like your house, car or boat – it can ding your credit score. Sprinkle in a few credit cards you routinely pay off.

Credit utilization ratio. Like I mentioned above, your score is highly influenced by the ratio between the credit you have (the amount of unused credit you have on your cards) against the debt you carry. When that debt to credit ratio is too high your score does a nose dive.

Three ways of using your credit utilization ratio to improve your score:

  • Call your card company and ask them to increase your limit. This gives you more unused credit – and it’s important you don’t use it!
  • Pay off your credit cards as quickly as possible.
  • Open a new credit card, put a small amount on it every month and pay it off every month. You’ll take an initial ding when they check your score, but that is quickly made up by a better credit to debt ratio (credit utilization ratio).

 

Don’t follow the same path I took.  Instead, follow what I learned. Paying down debt takes years. Think of it this way – by the time you’ve paid for what you’ve charged you won’t be using it anymore.

 

 

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