Let's talk about credit for a minute!
I had a conversation with a friend who said, “I don’t want to have credit cards because I am afraid of them, they are too tempting”. This comment threw me off, I didn’t understand this concept at our age, how can she feel this way, why would she be afraid of credit? Then it hit me she was traumatized over what happened to us in our late teen's early twenties. She isn’t over being used and abused by the credit card industry of the late 90’s early 2000’s.
Back when we were young they preyed on us! You basically had to be breathing to get a credit card. Who cared if you had a job to pay them, you just needed to be at least 18 and this “free money” was yours. Well, that is what I thought, this is free money, and... “who doesn’t want free money?”.
If memory serves me correctly I had 4 cards; a gas card, a store credit card, and two major credit cards. Each one served its purpose, I was loyal to those cards and used them all the time. Everything seemed great at first, the problem is no one taught me how to manage my usage and how to make appropriate payments.
So, this blog is going to focus on managing your credit. Please keep in mind I am NOT a credit expert, I am only giving you tips and tricks that work for me. I highly recommend you do your own research to figure out what works best for you and your situation.
Here is a list of things to always keep in mind when you are working to repair, build, or maintain your credit. Below I break down the five major factors and how they are weighted into your score.
Payment history (35% factor): This is the largest factor of your credit break down that you need to be mindful of. What this means is that you need to make consistent payments ON TIME every month. This is not just for credit cards, this also includes revolving loans (car, mortgage, student etc.) and bills (electric, WiFi, etc.). Lenders want to know that you are responsible, so get those payments out on time! Here are a few things I do, not all will work for you so feel free to apply the ones that do:
Set up auto pay directly with the company! I use this for my reoccurring bills such as my wireless bill and my car insurance.
Set up an appointment! We all have a calendar on our cell phones, add your due date to your calendar and ensure you have an alert set up, like an alarm clock it will remind you to make a payment. I use this for my credit cards, I even include how much I am going to pay, I always recommend paying more than the minimum and will touch on that next.
Set up email and text notifications through the lender! If this is available USE it, it is a lifesaver just in case you forgot to set up an appointment on your calendar and are not using auto pay.
Credit utilization (30% factor): This is the second largest factor and is just as important as your payment history. What this means is that you CANNOT max out your credit cards. A lender will look at your great payment history and will still run for the hills if this is not managed correctly. For example, let’s say you have a credit card with $3,000 in available credit or in other words your credit limit. DO NOT carry a balance into your next billing cycle over 30% of that limit. Actually, you should be well below that, from my research I have found that 6% is the sweet spot. See the example below and use it as a template (just plug in your credit card limit), this is a simple formula I use to ensure I am always at or below 6% utilization every month.
$3,000 x 30% = $900; the balance you can hold on your credit card in total every month.
$3,000 x 6% = $180; the amount you should strive for.
Use the formula above for all your cards. Or you can add all your limits together and to get your 6% utilization total, either way will work.
Pay more than the minimum payment, this is key! I use 1 of my CC’s for larger purchases. On this card, I tend to pay off exactly what I charge. For example, if I buy an airline ticket, I pay for that in full before or when it hits my statement. I always set aside what I have spent on the card in my savings account, if I know I can’t pay for it in full then I don’t buy it. So, if the airline ticket is $500, I book it with my card, save the amount, and when the charge hits my statement I pay that amount in full. Doing this keeps my balance low and I collect the rewards that come along with my card (i.e. cash back or points)
Make sure your cards don’t just sit with no usage! To keep them active use them for small reoccurring payments such as Netflix, Hulu, or any other monthly subscription. As I stated previously for payment history, these are great for auto pay. Let’s say you have 2 credit cards that you rarely use, I would use each one for a different subscription and set up auto pay, this way the cards remain active. Believe me, it is a win win…you are paying them on time and you are staying under the 6% usage. I use 2 of my credit cards for subscriptions ONLY. These cards started off with small limits and are now 5 figures because I keep them active and have great payment history on them.
Length of credit history (15% factor): This is the length of time each card has been open. It also includes when the card had the most recent action. Basically, the longer you have a card that you have great payment history and great usage the more desirable you are to lenders. Use your cards responsibly and try your best NOT to close them. The older the card with amazing usage the better. Also, closing a card will affect your utilization, if you have questions on what I mean here shoot me a message.
New Credit (10% factor): Only open new cards as needed. New accounts lower your average age, this works hand in hand with the length of credit history as called out above. What this means is if you have a credit card that has been open for several years and you open a new credit card account this new card will pull your length or age down. For example, say you have a card that is 5 years old and open a new card...your new age will be 2.5 years. Also, opening several new lines of credit in a short period of time can have a negative impact as well. It signals to lenders that you may be financially unstable and relying on credit and loans. Each new account you open also triggers a hard inquiry on your credit, which can be a ding too. Hard inquiries are when a lender pulls your credit report in order to evaluate your history.
Credit mix (10% factor): This one is pretty much just a mix of different credit you are managing. You will need a good mix of revolving credit; credit cards and installment loans (car, student loans, mortgage etc.). If you have a mix of credit on your bureau reports you appear less risky than those who have only one. It also shows the lender that you can manage different types of credit.
If you do not have an installment credit I recommend you get a small loan so that you can show a lender you can manage it
To sum this all up, pay your cards on time, keep the balances low (under 6%), the longer you have your cards in good standing the better, only get new cards when absolutely needed, and always have a mix of credit cards and installment loans.
* Did you know that you get free bureau reports annually - click here *
Thank you for stopping by loves!
XOXO
KJ