utilization

Larger Credit Limits Can Result in a Better Credit Score (But Be Careful!)

Rachel — Thu, 24 Aug 2017 12:53:59 +0000

Larger Credit Limits Can Result in a Better Credit Score (But Be Careful!) Rachel Thu, 08/24/2017 - 08:53

Use your plastic carefully for a better credit score
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Bouncing back after bankruptcy is a journey and those that racked up big credit card debt that was discharged in Chapter 7 or 13 might be gun shy about plastic. However, rebuilding your credit score after bankruptcy is critical and it’s almost impossible to do without credit cards. If you were burned by credit card debt before, you may not want to have larger lines of credit open to you. But if you keep your limits low out of fear, you’ll cheat yourself out of a better credit score.

Rebuilding Credit Starts Slowly and Is a Process

After you get your bankruptcy discharge, within just a few months, you should see credit card offers in your mailbox. At first, these will likely be low quality offers that come with higher interest rates. Worse than high interest rates, though, are those that come with monstrous fees. Some secured cards will offer a low credit line of $200 (on average), then charge $100 annual fee, $50 account set up fee, and other charges so that you get the card and already owe most of the credit line without buying a thing.

It’s best to not take the first offers that come in and instead wait for better ones to come along, which should happen within six months or so after your bankruptcy discharge. The interest rate is not as important as the fees and other charges if you use your cards wisely. For instance, if you can get a secured card at 25% with no annual fees or set-up charges, that might be better than a card with 20% interest but exorbitant fees.

Interest Rate Shouldn’t Matter If You Pay On-Time

Interest accrues on balances owed at the statement date on your credit card. If you pay off your balance prior to the statement cutting, you won’t be charged interest. For instance, if you use your card to pay your cell phone bill of $100 on April 5 and you know your credit card statement closes (stops for the month) on April 20, you can go online to access your credit card account and pay a few days ahead, say April 12, so that your statement closes with a zero balance and you pay no interest.

By managing your credit cards carefully by date and always paying off balances in full, you can avoid interest charges. You may think the best approach to definitely avoid interest is to get a credit card and not use it at all. That sounds great but if you don’t use your card, the card issuer will close out your account and then your credit score will drop. It’s better to use your cards for normal expenses such as paying utilities, gassing up your car, and your Netflix subscription, then pay off promptly.

How Higher Credit Lines Help Your Credit Score

One of the biggest factors in your credit score calculation is utilization. This is the percentage of your available credit that you’re using. If you have two credit cards with $500 credit lines, you have a total of $1000 in credit. If you have a total balance of $100 on your cards, that’s a 10% utilization (100/1000=10%). If you have $250, that’s 25% utilization. Once you go above 20%, your credit score can drop and one you’re close to 50%, it will drop more. The greater the utilization, the lower your score.

You can groom your credit lines by regularly asking for increases from card issuers. Having a lot of available credit and low utilization benefits your credit score. Plus, if something happens and you must carry a balance, the impact to the utilization factor in your score will be lesser. If you have double the credit line as above, $2000, with a $100 balance, that’s just 5%. With $200, that’s just a 10% utilization. Regularly asking for line increases is critical to a healthy score.

To find out more about rebuilding your credit score after bankruptcy, contact Credit Score Keys today. Call 919-495-2365 for a free consultation.

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Tip: Use Your Credit Cards to Protect Your FICO Score

Rachel — Thu, 17 Aug 2017 13:04:17 +0000

Tip: Use Your Credit Cards to Protect Your FICO Score Rachel Thu, 08/17/2017 - 09:04

Your credit card accounts can be closed without notice
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Although it seems counter-intuitive, the fact is that if you do not use your credit cards, it can (indirectly) harm your FICO score. You might think it’s enough to have a few credit card accounts in your name, that you rarely or never use so that you have items on your credit report. However, if you leave your cards unused, you can find yourself slammed by your card issuer out of the blue – and your credit score can drop as a result. Here’s what you need to know.

Credit Card Issuers Expect You to Use the Plastic

First, as a card holder, you are a customer to the credit card issuer. However, if you don’t transact by swiping the card now and then, you’re not a good customer. Card issuers make money in a few different ways. One is if you carry balances month to month and they can charge you interest. Another is off fees like annual fees, over-limit and late payment fees.

But even if you pay your balance in full each month, never run late, and never go over the limit, your credit card provider can still make money off of you so long as you use your card. Stores, restaurants, and any business that allows you to use a credit card pay out a percentage of each sale for the privilege. But if you have no activity, there’s no profit and no incentive for them to stick with you.

Account Closures Can Come with No Notice

If you leave a card account fallow and don’t use it for an extended time, the credit card issuer can close the account without any prior notice. That document with the microscopic fine print that comes with your card and is labeled “terms and conditions” includes a list of a whole host of reasons the card issuer can suspend you as a customer and take back your charge privileges.

You will get a notification that your card account was closed but might not know ahead of time that it’s coming. If you have a pattern of not using your card, the issuer has no profit incentive to keep you on their customer roster, no matter how long you’ve been a card holder. Using your cards, even occasionally, goes a long way to convincing card issuers to keep you as a customer.

Losing an Older Account Lowers Average Age of Credit

Your credit score is a calculation based on several factors. One of these is the average age of credit. This is calculated as a simple average. You add up the numbers of years all your revolving credit lines have been open and divide it by the number of accounts you have. Let’s say you have five cards and the oldest has been open for 12 years, one for seven years, two for five years, and one for one year.

The average age is six years (12+7+5+5+1/5). If you aren’t using your oldest card and the issuer shuts the account, your average age drops to a little more than four (7+5+5+1/4). This can cause your credit score to take a dip even though none of your behavior has changed and you’re not any deeper in debt or delinquent on your obligations. Keeping older accounts open is advantageous.

Any Account Closure Can Wreck Your Utilization If You Carry Balances

Not only can an account closure drop your credit by reducing your average age of credit but it can also cause a major drop if you’re carrying a balance. For instance, if your oldest card has a higher rate of interest because your credit wasn’t as good when you got it, you might not use it. Then suppose you just had a big car repair and couldn’t pay it all off, so you’re carrying a balance.

If the five cards have a combined credit limit of $10,000 and you’re carrying a $2,500 car repair balance, you’re at 25% utilization (2500/10000=20%). Then say the oldest account is closed and it had a $3k credit limit. Note that your utilization is instantly higher at 36% (2500/7000=35.7%). That’s way too high, and your credit score can drop with no other changes to your credit profile.

When It's Okay to Close Accounts

Sometimes when you’re just starting out, you might obtain a credit card with a higher interest rate or an annual fee that you don’t like. If you’re a customer in good standing, you might be able to negotiate better terms and get rid of the annual fee or drop the interest rate. If you don’t carry a balance, the interest rate doesn’t really matter.

So long as you’re not carrying balances and closing the account won’t wreck your average age of credit, it’s no big deal, but be aware of the consequences before you close an account. To avoid having an account closed involuntary, you should use all your cards regularly. Consider setting up small recurring items, one to each card such as your cell bill, Netflix, etc. and then pay off in full each month.

To find out more about improving your credit after bankruptcy, contact Credit Score Keys. Call (844)659-3226 to set up a free consultation today to get your credit score on the right track.

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How Using Cash Advances Can Hurt Your Credit Score

Rachel — Thu, 10 Aug 2017 13:04:06 +0000

How Using Cash Advances Can Hurt Your Credit Score Rachel Thu, 08/10/2017 - 09:04

Cash advances come at steep costs
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Most credit cards offer the option to take a cash advance. Some card issuers send out blank checks you can write that, when cashed, will operate as a cash advance. Others provide a pin number so you can easily take out cash at an ATM or while checking out at the grocery store. Others allow you to go to the bank, swipe your card, and walk out with money. No matter the mechanism, taking out a cash advance is something you should consider carefully because of the consequences. If you’re rebuilding your credit after bankruptcy, you should be extra cautious of using a cash advance.

Taking a Cash Advance Won’t Directly Hurt Your Credit Score

The first thing to know is that taking a cash advance will not directly drop your credit score. So, you can breathe easy if you need to take a few hundred dollars on one of your cards in an emergency. There’s no instant and associated penalty on your credit report for using a cash advance. However, there are other consequences of taking cash from a card that can come back to bite you.

Using Cash Advance Increases Utilization

One way that using a cash advance can indirectly lower your credit score is by increasing your utilization. This is calculated as the percentage of your available credit that you’re tapping. If you have $5,000 in total credit line across all your cards and carry no balances month to month then take a $500 cash advance, that’s not too big a deal.

That $500 represents the use of 10% of your credit line and is not high enough to trigger a ding to your credit score. However, given the same credit lines, if you’re carrying $1,500 in card debt and take out $500 in cash, that bumps you to $2,000 which is 40% credit utilization which is way too high and will lower your credit score. So, mind your balances.

Taking Cash From a Card Comes at a Higher Interest Rate

It’s also important to remember that a cash advance doesn’t operate like a regular credit card purchase. Most credit cards offer one interest rate for purchases and a much higher one for cash advances. So, while paying your cell bill with your credit card comes with an average interest rate of about 15%, cash advances run one to seven percent higher (but can be much more depending on the card).

This means you can be charged 16%-22% for a cash advance but with some cards, cash advance interest is much greater. If you must take a cash advance, paying it off ASAP before your statement cuts should avoid the interest charge. Taking a cash advance should be treated as a big decision and one to use only when no other less-costly option is available.

Upfront Cash Advance Fees Are Common

In addition to the steeper interest rate, many cards charge a fee to access the cash advance feature. You can be slapped with a $10-$20 cash advance fee that’s tacked onto your card balance immediately. In some cases, the cash advance may be even higher – the ten to twenty mentioned here is an average. Your card provider may assess a much steeper upfront charge.

That charge is on top of the interest charge, and itself will accrue interest. So, for instance, if you take out a $100 cash advance and your lender assesses a $20 fee, right away that’s a 20% premium charge, and then interest charges pile up on top of that. If you don’t pay the cash advance back ASAP, there’s no telling how much that $100 will cost you in the long run.

Cash Advances Should Be Avoided When Possible

Because of the higher interest rates and fees associated with cash advances, they should be avoided when possible. If you need cash to pay a utility bill, why not pay the bill using your card instead of taking out cash? That way you’ll only pay standard interest. If you need to pay someone back or loan them money in a crunch, consider sending money through PayPal funded through your credit card. That way it’s like a standard purchase rather than a cash advance.

As with any credit card purchase, paying off the balance ASAP, before interest accrues is the best route to avoid getting in over your head with credit card debt and racking up costly interest. Did you know you can pay off your balance before the statement cuts? You can easily access your card accounts online and pay through the issuer’s website a few days before the statement closes to avoid interest charges.

To find out more about rebuilding your credit after bankruptcy, contact Credit Score Keys for a free consultation. Call 844-659-3226 today to talk to one of our credit experts.

Resources:

Costs of cash advances

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How Does Your Credit Score Stack up to the Average American’s?

Rachel — Thu, 09 Feb 2017 08:07:29 +0000

How Does Your Credit Score Stack up to the Average American’s? Rachel Thu, 02/09/2017 - 03:07

Is your credit score above average?
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The latest survey by FICO (Fair Isaac Corporation) shows that, in general, American consumers’ credit scores are on the rise. In case you’re wondering how your credit score compares to others, the average in the United States is a 700 FICO score. Here is more info from the FICO survey and what you can do to increase your credit rating.

FICO Survey Results
Based on the latest score calculation, FICO 9, those aged 43 and up have the highest credit scores averaging at about 816. For those aged 29 and under, scores average closer to 770. Those with the highest scores have an average of 128 months of history.

The average age of credit is critical to a higher credit score, and those with the best scores have 305 months on their oldest lines of credit. That’s a whopping 25 years of credit history that can boost your score - but length of history and the average age isn’t everything.

Those with higher scores open new accounts less frequently and have an average of nine months between hard pull credit inquiries. Not surprisingly, those with higher scores also have a track record of on-time payments. Close to 95% of those with the highest scores have no delinquencies.

What Drives Your Credit Score?
FICO keeps the exact algorithm of its credit score calculations - they do share the factors that weight into the score. FICO scores range from 300 to 850. The largest chunk of the calculation derives from your payment history – it makes up 35% of the score.

Balances owed makes up 30%, and that’s the utilization factor. It’s not just how much you owe but the percentage of how much you owe compared to your available credit lines. Credit mix counts for 10%. That is the blend of revolving credit and installment loans.

Another 10% is new credit so periodically adding new accounts to your credit roster can boost your score, but isn’t the most critical factor. The final 15% of the calculation is the length of credit history. That means it’s wise to keep older accounts open and in good standing.

How Can You Improve Your Credit?
When you’re rebuilding credit after bankruptcy or striving to improve your credit, you must be very mindful of your habits and the choices you make. Paying your bills on time is the foundational behavior that will help keep you on track.

Avoid credit card overuse and carrying large balances. Keep your utilization low and don’t charge things that you can’t afford. Using credit to live a lifestyle above your income level is never a wise financial move. Use cards and pay off in full each month where possible.

Occasionally open new accounts, but only apply for things you’re certain you’ll be approved for – and that means doing your homework. Improving your credit is a process that takes time, diligence and patience, but can be quite rewarding.

Work on Your Credit ASAP After Bankruptcy
Credit Score Keys works with people that have filed bankruptcy and are looking to boost their credit scores now that their debt is under control. There is a persistent myth that filing bankruptcy wrecks your credit for a decade but that is not at all accurate.

Within a couple of months of receiving your bankruptcy discharge, you can start working on your credit. Step one is to check your credit report for errors. Step two is to research a secured credit card that will accept your bankruptcy past. Step three is to use the card wisely.

The next step is to work on getting an unsecured credit card and build from there. Re-establishing your credit score after bankruptcy is a slow process but one that should be started as soon as possible after your discharge to get you on the right track.

To find out more about improving your credit score after bankruptcy, contact Credit Score Keys today for a free consultation. Call 919-495-2365 today to discuss your credit and how we can help.

Resources:
FICO score survey

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