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Manage Your Credit

MoneyPulse – Helping you achieve your financial goals

Last month, in the debut of Money Pulse, we talked about budgeting. I really appreciate the great feedback I received from the article. Our goal is to give you some financial information that can put you on a path to reach your personal financial goals.

Before we provide some information on credit, let’s start with a challenge: the tax refund challenge. When you receive your refund, save at least half of the amount you receive. Yes, 50 percent. That is not the challenge. The challenge is to have that money in savings next year when you get your refund. You pay bills 11 months out of the year without that small windfall, so just keep going on business as usual—unless you rely on the full amount for the Great American Christmas Payoff. I think most of us know what this is, but here’s a brief rundown of the process:

-Know the exact amount of available money on every credit card you own, or strategically visit all of the short-term loan companies that still have you on file from the previous year.
-Make a shopping list of names of individuals to receive gifts. Go to the mall and spend the exact amount to max out each card, but not enough to be embarrassed by a card being declined in the long checkout line.
-Walk out with no worries because you will pay it off with . . .  your tax refund.

Unfortunately, this is a very common practice in way too many households. We have forgotten one of the most basic principles of using credit: only charge what you can afford.

So, we are going to look at some basic tips to help better manage credit. Knowing what credit bureaus are looking at each time they adjust your scores is valuable information when trying to improve or maintain credit scores.

Here are the things that make up our score and how they can affect our score.

35% – Payment history: PAY ON TIME
Everyone knows this has a big effect on our scores, but here is a number to put with that knowledge.
According to equifax.com, one 30-day-late payment could cause as much as a 90–110 point drop in your scores. In 2015, the average national credit score for a consumer with no late automobile payment is 703; for those with at least one late payment, the average is 605.

30% – Amounts owed: KEEP BALANCES DOWN
So, the Great American Christmas Payoff may not be the best strategy. Once your credit card balance goes over 30 percent of the available balance your score can begin to decline. When you purchase a new car your scores may drop a little until you begin to show some payment history and lower the balance. Most of us believe this is because of the inquiry, but according to myfico.com one inquiry should have minimal impact on your score. However, the amount owed on the installment loan once it is reported is 100%.

This is also one of the reasons you don’t close unused credit cards.

For example: You have two credit cards, Card 1 and Card 2, with a $500 available balance on each card. You have $200 charged on each card. You are using 40 percent of your available balance. You decide to stop depending on credit so much so you are only going to use one card from now on. You transfer the balance from Card 2 to Card 1 and then close Card 2. Big problem! Now you are using 80 percent of your available balance and your score is going to suffer because of it.

Extra tip: Never close a credit card or line of credit with a balance still remaining! This is a common mistake when we decide to clean up our credit or have a dispute with the company. However, this has the same effect as the example above, the balance will continue to count against you without the benefit of the available credit limit.

I don’t care how much the lady at the 800 number upset you, don’t do it.

15% – Length of credit history: DO NOT CLOSE YOUR OLDEST CREDIT CARD, EVER
A percent of your credit score calculation is based on how long you have had credit and how often you use it. Accounts go dormant after six months of inactivity, meaning they do not report in your scores.

10% – New credit: HAVE A CREDIT CARD OR TWO AND USE THEM
Opening a new account can be a good thing. Just make sure you don’t open a lot of accounts in a short period of time. The same goes for credit inquiries. One or two times over a couple of months is not going to crush your score. Ten probably will.

10% – Mix of credit: USE ALL FORMS OF CREDIT
A mix of credit cards, installment and mortgage loans with a good payment history will show very favorably on your credit score.

Here are some simple tips for credit management:
-Make sure credit you apply for will report to all of the three major credit bureaus. Experian, Equifax and Transunion.
-Protect your credit. Don’t run from collectors or lenders. Believe it or not, lenders want to work with you to make your payments and make them on time. If you are in a tough situation, answer the phone and talk to them or pick up the phone and call them first. This can avoid collection items and credit headaches down the road.
-Don’t get hung up on minor things like inquiries, focus on paying bills on time and not being overextended.

Credit can be fixed! Your credit score is a scorecard of your risk at this particular moment in time. Effort, time, determination and maybe a little money, and your score can rise as high as you are willing to take it.

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About the Author

Bernard James, a Community Reinvestment Loan Officer with Guaranty Trust Company in Murfreesboro, aims to help area families and individuals achieve the financial goals that they have set. Contact him at (615) 631-2877 or bernard.james@guarantytrust.com.

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