If you are NOT one of the many who has been lured by easy credit in the past and you have very little debt, you should pat yourself on the back! Well done, that is a major achievement!
If you have escaped living with credit card debt, you should know and understand that not having any reportable debt might come back to haunt you later on in life. So it is wise not to avoid Credit like the plague (or like Covid)! But to ensure that the credit you do have is working for you and not against you.
The basic truth is we all need a good credit score, to accomplish our dreams and desires. Whether that be owning a home, or starting up a business. We need to show that we are responsible with credit, which will help to increase our credit scores.
With better credit scores, we will be able to receive better interest rates on big loans like mortgages and vehicle purchases because the bank will trust us more that we are able to pay off the loan without defaulting.
Credit scores and the thoughts of having lots of credit readily available scare a lot of people, I think largely because this type of information is not taught in school at any level and sometimes people think it is taboo to discuss openly with family and friends or even their accountant.
One of the best things you can do to achieve and keep the best credit score possible is to use your credit cards appropriately. Which first off means trying to pay the credit cards off in full every month, if you can’t pay off your credit cards in full each and every month don’t despair. It's actually the overall amount of credit you have and how much of it you are using regularly that affects your credit score. Not so much whether or not you paid the bill in full.
Did you know that 30% of your credit score calculation is based on what is called credit utilization. Credit utilization looks at the amount of credit you are using on each card and as a whole and divides it by your credit limit on a per card and overall total basis.
Let’s say you have 2 credit cards both with a 10K limit. If you have a balance on one card of $8000 because it has a low interest rate and the other card you usually charge about $1000 to it each month. Well card #1 has an 80% utilization rate and card #2 has a 10% utilization rate individually. Then combined you owe 9K on available credit of 20K, which is a combined utilization of 45%.
Now you might ask, what should my credit utilization be to get the best effect on my credit score. There of course if no black and white answer, but generally speaking experts say that credit utilization should be about 30%.
So in my example above, 6K would be the quote unquote right amount to carry on the cards, ideally split between the 2 cards.
Take some steps today to build your credit score by making good credit decisions, so that when you do need to borrow money:
1. It hopefully won’t cost you an arm and a leg.
2. Hopefully you will have less hoops to jump through paperwork wise.
Lastly, make sure you check your credit score/report regularly, so that there are no surprises the next time you try to get credit at the bank.
Until next time...
Christine Walters
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