Credit – The Basic Do’s and Don’ts

Credit is a primary source of stress for many households and is a topic that sometimes leads to arguments between couples. But it doesn’t need to be so stressful. Many issues with credit are caused by misunderstanding how to properly handle credit card debt, due in part to a lot of misinformation on the internet. So why does what I have to say mean anything? With over 25 years of personal and mortgage credit financing experience, I believe I have seen everything pertaining to credit debt and I’m here to share this experience with you. My goal is to help provide some clarity and guidance to help you improve your financial situation and alleviate some stress.

Why is credit so important?

Credit scores are based largely on your credit history, which reflects the risk associated with the extension of credit. Creditors use your credit history to determine the likelihood you will pay them back. The higher your credit score, the more likely it is that you will pay your debts with less hassle to the creditor.

If you have a history of making your payments late, the creditor views this as a riskier loan and will demand a higher rate of interest. Higher credit scores open financing options that are not available to those with lower credit scores and lead to lower interest rates that can save you tens of thousands of dollars over your lifetime when you factor in the lower rate options on mortgages, auto loans, credit cards, etc.

Rules for proper credit usage

Here are some rules that can guide you to proper credit usage, raise your credit score and keep it in good standing.

Rule #1: Always make your payments on-time. Do whatever it takes to make sure that happens because the consequences of having a late payment report on your credit can be extremely costly. For a late payment to impact your credit, it must be made 30 days after the due date. Don’t panic if you missed the payment by a few days and were charged a late fee. This will have no impact on your credit score. Late fees are a waste of your money, so I advise you avoid those, but sometimes it is unavoidable. Life happens and that’s why you have a grace period before it hits your credit. The key is to get back on track next month.

Rule #2: Don’t open the department store card that you’re offered at checkout to save 10% off your next purchase. It’s not worth it. Each time a new account is opened, your score drops a bit because it reduces the average length of your credit history. Each credit inquiry can have an adverse impact on your score. It becomes far too easy to miss a payment when you’re juggling a couple dozen different bills and this typically leads to late payments, late fees and negative credit reporting.

Rule #3: Credit diversification is good. Having more than one credit account proves to the credit bureaus that you’re able to balance and manage your debt accordingly. I recommend three to four different credit cards. Carrying a Visa, MasterCard, Discover and/or American Express is good. A car loan or two and a mortgage helps provide additional diversification to help elevate your credit scores.

Rule #4: Don’t max out your credit cards. The ratio of your balance to credit limit on each card is very important. Ideally, you should keep your balances below 30% of their limits. If you do have large balances, once you’re within 60 days of making a large credit purchase, like getting qualified to buy a home or to finance a new vehicle, you will want to pay that balance down, as it can take 60 days for your balances to update on your credit.

Rule #5; This applies primarily to those that have hit hard times with their credit and are trying to rebuild. The rule here is to throw common sense out the window. Common sense tells you that paying off collections is good for your credit. However, it could have exactly the opposite impact. It is possible that paying off a collection account will cause your credit scores to fall. This is due to how the information is reported to the credit bureaus and how the credit scoring algorithms work.

Several credit basics to remember

1) You do not need to pay interest on a credit card to build or rebuild credit. Paying your balance in full on or before the due date will have the same impact as carrying a balance month to month that you pay interest on. I never recommend paying interest on a credit card unless you are truly unable to pay it off.

2) Don’t be afraid to close a credit card. Yes, an item that impacts your score is the average length of time your accounts have been opened but if you have a long, well-established credit history, closing a credit card will not have a significant impact on your credit.

3) Be sure to monitor your credit regularly but know that the score reflected through the various monitoring apps are not your actual credit score. The data integrity on these apps is good and the credit score trends are fairly accurate, but it is a different scoring algorithm than what is used by credit agencies, so the scores can be inaccurate.

4) There is nothing you can do with your credit that you can never recover from. Bankruptcies, foreclosures and repossession will all fall off your credit eventually. If life happens to throw you a big curve ball and your credit receives a major hit, you can always rebuild it. It takes time and discipline, but you can always get back to having scores in the high 700s and possibly 800s. I’m always happy to help answer any questions you have about credit, so don’t hesitate to contact me. Feel free to email me at jbartley@omglending.com or DM through my various social media or drop by my office, 340 Hickory Street, Suite 4, Red Bluff.