With over 20 years of experience guiding individuals and small businesses through the confusing world of credit, Gerri Detweiler joins us to debunk some credit myths and teach us some best practices for credit cards.
A credit score (also known as FICO score) are numbers that represent the creditworthiness of a person, the likelihood that person will pay their debts. Lenders, such as banks and credit card companies, use credit scores to evaluate the risk of lending money to consumers.
Your credit score is made up of several factors that have a different weight on your score.
PAYMENT HISTORY is a large contributing factor to your credit score. Banks and credit card companies want to know that you can pay back your loans on time.
AMOUNT OWED (also known as credit utilization) refers to how much credit you are using at any given time compare you how much is available to you. If you have a credit limit of $10,000 and you’re spending close to that limit each period, you are going to look more risky, even if you are making payments on time.
CREDIT HISTORY meaning the length of time that you’ve had access to credit (number of years you’ve had a credit card or loan). This is one that you might have less control over but the key part is to keep your accounts open so you have years of proof that you are a responsible borrower.
CREDIT MIX (# of loans vs credit cards) and applying for NEW CREDIT are also contributing factors. A variety of credit is good but always applying for new credit accounts can look risky.
As you can see, there are a lot of contributing factors to consider. The general rules are (1) make your payments on time and (2) keep balances low.
BONUS: WTF is a Credit Limit?
Increasing your credit limit is an easy way to improve your credit score and all you have to do is request an increase! CNBC reported that Americans have an average of $22,751 in credit available to them across all their credit cards.
A credit limit is the amount of available credit you have or the amount of money you would have access to on your credit card. By itself, it doesn’t have much impact. But credit utilization, the ratio of amount owed against the amount available, can make a big difference.
Some credit issuers automatically increase your credit limit if you have made 6-12 months of on-time payments. If you do not receive an automatic increase, usually all you have to do is ask! You can usually request an increase in the banking apps or call the customer service line for the credit card. The bank will check if you have a healthy credit history and then let you know what you are eligible for. It’s as easy as that!
If you are not regularly making on-time payments or you know you are a big spender, increasing your credit limit might not be the best idea. Consider your whole financial picture before making big moves across all your credit cards.
When used in a healthy manner credit can be useful and rewarding. To learn more about credit scores, check out our episode with Gerri Detweiler available on Apple Podcasts, Spotify and iHeart Radio.