Consumer Credit Tips

Whether you’re an established savvy Saver or still a work in progress, the benefits of good credit are far reaching and long lasting. Among other things, a solid credit profile and high credit score makes you less risky to lenders. Why it can even lower your interest rates on credit cards and home loans (and save you money). But how do you go about building good credit – and maintaining it for the rest of your life? It’s hard to believe, but there’s not all that much accurate, readily available information out there to help you figure it out. Luckily, there are just a few really important things you need to keep in mind to create, maintain and enjoy a solid credit profile.

In many ways, less is more. Having too much established credit can make you look too “leveraged” or overextended. It’s better to go for quality over quantity when building your credit profile. Establishing a credit card account with at least one major bank almost guarantees that your payment history will be reported to all 3 credit bureaus and establishes your credit “worthiness” to other creditors. When building credit, make sure to take these things into account: payment history, amounts owed, length of credit history, types of credit in use and newly established credit. All contribute to building a positive credit profile and credit FICO score.

Using credit responsibly. Assuming you’ve established a credit card account, it’s important that you manage that account responsibly. When making a purchase on a credit card, don’t just look at the minimum due each month. The truth is, a single purchase may take months, sometimes years, to repay. You don’t want to carry a balance each month, especially if you don’t have a great credit card rate in the first place.

Traps and pitfalls to avoid. One of the best ways to avoid credit card trouble is to be well informed and organized. Read through your monthly billing statements and review all the charges on your accounts. If you don’t understand the statement, call customer service and review the bill until it’s clear. And remember, the new CARD Act of 2009 means creditors will need to give you 45 days’ notice to raise interest rate changes on a card. This new disclosure will help prevent high interest charges on your account without your prior knowledge. You’ll have the right to “opt out” of a particular change and maintain the current rate. The tradeoff? You’ll need to close the account. Also, the new law means you’ll get lower rates reinstated after 6 consecutive months of timely payments.

Clearly, there’s a movement for increased consumer protection. And it starts by taking personal responsibility for your credit profile. If you haven’t started building one, get started. And take good care of it.

Debts to Pay Before Credit Cards

In many of the previous articles I spoke on the many ways to remedy credit card debt effectively. It is also important to know what debts should take priority in terms of repayment prior to credit card repayment. Figuring out which debts to pay first can often be a very difficult question, as many creditors may be very proactive in collection procedures. A consumer might not receive as much attention with a late mortgage or car payment. Lets begin to take a look at the debts that need to be addressed prior to the credit card bills.

•Family Necessities – Food, essential medical expenses.

•Housing Related Bills – Mortgage payment, real estate taxes, insurance rent.

•Utilities – Con Ed, gas, oil, and electric bills.

•Car Payments – This is especially important if the car is the only method of getting to one’s place of employment. This would also include car insurance.

•Child Support – (if applicable) Non-payment can result in imprisonment.

•Income Tax Debt – Not paying could cause loss of refund or garnishment.

•Court Judgments – If a judgment has been ordered, it may be wise to make payment a priority, as the risk of seized property or wage garnishment could exist.

•Student Loans – Failure to pay could result in loss of tax refunds. I person may qualify for deferment or forbearance.

•Non-collateral loans – These accounts take on a lesser priority. Credit card debt, debt owed to professionals, open merchant accounts. Accounts still will go to collection agency for non-payment.

Secured debts should be first on the list to be paid. This is because the creditor can take the collateral used to satisfy the outstanding debt. (i.e. car, home.) Priority lists can be made for individual circumstances and situations. Obviously, every consumer's situation is unique but this information to be used as a general guideline to formulate the beginning of a debt repayment plan.

Understanding FICO Scores - New Credit

Many aspects of a FICO score can be the balance of various pieces of consumer information. Opening a bunch of new accounts in a short period of time might put up a red flag to a creditor. How many new accounts you open in a given period of time is reviewed by the FICO scoring system. How long it has been since you opened a new account is also factored into the scoring model. Inquiries also impact the credit score. It is not a good idea to have too many third party inquiries generated on a credit report. It is a good idea to monitor your own credit reports. The inquiries generated by an individual do not adversely effect a credit score. However, inquiries generated by 3rd parties could lower a score, should those 3rd party inquiries become excessive.

Understanding FICO Scores - Types of Credit

The FICO score is based on a mix of credit cards, retail accounts, installment loans, finance accounts, and mortgage loans. It is not necessary to have one of each account. It is also not a good idea to open accounts that you do not intend to use. The more you can diversify your accounts, the more helpful it will be to present a more balanced credit profile. The idea is to have a credit profile which is being used, but also has a healthy degree of diversification. Types of credit in use usually account for approximately 10% of the FICO score.

Understanding FICO Scores - Length of Credit History

Approximately 15% of the FICO score is related to the overall length of time your accounts have been in use. In general, a longer credit history will increase your FICO score. It is still possible to have a decent FICO score without a long credit history if the rest of the credit report is in good standing. The calculation of the FICO score takes into account the age of your oldest account, newest account, and the average age of all your existing accounts. It is important to show some activity on your accounts as well.

Understanding FICO Scores - Amounts Owed

Having credit card accounts and having balances on them does not necessarily make you a high-risk borrower. However, when a high percentage of available credit is used up the FICO score can be adversely effected. The general rule is to try to keep your balances under 30% of the total available limit of a credit card. For example, if one had a card with a 10K limit, a good idea would be keeping the balance under 3K. The amount owed on all accounts plays an important part in the scoring as well. Even when one pays their accounts off in full each month, the credit report usually reports the total balance shown on the last statement. The amount owed on all accounts and on different types of accounts is also a factor. Sometimes having a small balance on a card and managing it responsibly can have a stronger positive impact on a credit score then just closing out an account. If a large number of accounts are carrying balances, this could give the perception to a creditor that an individual is over-extended. Paying down mortgages and installment loans play a very important role in terms of credit scoring. The main idea here to understand is that having balances is not in itself a bad thing, but as one gets closer to the limit on the credit lines the scores tend to go down

Understanding FICO Scores - Payment History

35% of your credit score will be based on your credit payment history. One of the most important factors a creditor will want to know is if you have paid your past credit accounts on time. It should be noted that if you have late payments in your payment history it does not automatically ruin a credit score.

An overall good picture can outweigh one or two late payments.

Remember when discussing payment history we are including more then just unsecured credit card accounts. Payment history would include car payments, mortgage payments, installment loans, etc.

Certain items that would be considered fairly serious would include public records, bankruptcies, foreclosures, wage attachments, judgments, child support payments, and collection accounts.

The specific details of when an account was late makes a large difference. For example an account 60 days late 2 years ago might not be as damaging as a mortgage payment that was late last month.

Often times it is possible to improve a credit report by having old and inaccurate items removed. We will talk about credit reports in future installments.