On Dasher on Dancer on Mastercard and Visa!
It’s the most wonderful time of the year! Full of twinkle lights, merriment, holiday music, family time, sweet treats, and the wonder of Santa and his eight magical reindeer. It’s also the time of year when a lot of people’s credit scores drop which could take the better part of the next year to recover from.
If you have a credit card, you owe it to yourself to use it the right way. Making any of these credit card mistakes could cost you money and precious credit score points.
Maxing Out Your Cards
One important factor that could be affecting your credit score that I myself was unaware of until just recently is something called credit utilization. Simply put, your credit utilization is the amount of credit you are actually using relative to the amount that is available to you. So if you have a credit card with a $5,000 line of credit and you carry a $2,000 balance, your credit utilization is 40%. In order to keep your credit score up, it’s important to keep your credit utilization below 30%. The lower the better!
Many people see no problem with spending up to the limit on their credit cards as long as they don’t go over the limit. But clearly, maxing out your credit card will result in having a very poor credit utilization, which will lead to a lower credit score.
If you don’t make your credit card payments on time, your credit score will sink. In fact, your payment history is the largest factor affecting your credit score, accounting for 35% of your credit score! Not only does missing a payment bring your credit score down, but it may also incur hefty fees and can even raise your interest rate. If you’re already in a financial bind, missing a payment will only make matters worse and can have a long term negative impact on your credit score.
A great way to avoid missing a payment is to set up automatic payments for your credit card through online banking or directly through your credit card company’s website.
Canceling Your Credit Card
Canceling a credit card might seem like a good idea, especially when you are trying to dig your way out of credit card debt. But before you cancel that card, consider that canceling your card may actually have a negative effect on your credit score.
A significant portion of your credit score is determined by the amount of available credit you have. Canceling a card will reduce the amount of available credit you have, and quite possibly lower your score. As an alternative, you can always cut up your card without canceling it. This is particularly important if you plan to apply for a mortgage, car loan, or other personal loan in the near future.
How to Check Your Credit
It’s important to know your credit score and monitor your credit regularly so you can make the most informed financial decisions and begin taking the necessary steps to improve your score.
There are three major credit reporting companies – Equifax, Experian, and TransUnion. Each company maintains a separate report. You have the right to a free copy of your credit report once per year from each of the three companies at http://www.annualcreditreport.com. You can also call 1-877-322-8228. There are also free resources like Credit Karma that let you keep a close watch on your credit score.
Until the next time,
– Katie T.