The Facts
- Paying bills late
One of the biggest factors in determining your credit score is your past payment history. While one or two late payments on your credit cards, loans, or other important obligations over a long period of time may not significantly damage your credit record, making a habit (or mistake) of it can count against you. - Not paying the minimum amount required
If you don’t pay at least the minimum amount due, your creditors will eventually report your account as past due, which can damage your score. Additionally, paying less than the minimum can result in late fees and additional interest charges which can add up quickly. - Keeping debt levels too high
If you “max out” or already owe a lot of money on your credit cards, potential creditors may question your ability to repay. Creditors also use this information to evaluate loan approval or interest rate charges (higher interest rates are used to compensate for higher risk). - Owning too many credit cards
While offers to sign up for credit and department store cards with free gifts or extra savings may be tempting, having access to all of that credit may be detrimental to your credit score because, even if you don’t use the cards, potential creditors may worry that you won’t be able to repay a new obligation if you decide to use all that credit. Plus, all those “inquires” into your credit report may indicate to lenders that you are having financial troubles or are on the verge of getting too deeply into debt. - Not alerting creditors if you’ve moved or changed names
If you move between apartments frequently and don’t change your address on bills, you run the risk of not receiving bills on time and suffering late payments as a result. Not notifying creditors of a name change could result in your credit report not accurately reflecting the credit you’ve worked to build. - Not periodically checking your credit report
Many people never look into their credit report until they’ve been denied for a loan or credit. Inaccurate or missing information in your credit report could raise your borrowing costs or cause delays when you’re in a rush to make a major purchase, like a car. - Not using your full legal name in financial documents
Bank accounts, credit applications, and other documents that become part of your credit history come to be on your report through a variety of ways, many of which do not have many other identifying factors like your social security number. Using your full legal name helps to make sure that your information ends up on your report. According to a FDIC senior Consumer Affairs Specialist, it’s not uncommon for a child and parent with similar names to show up on each other’s credit report.
- Keep your balance low in relation to your available credit
Keeping your credit balance to 25% or below your available credit is a good general rule. But, don’t open credit accounts you don’t intend to use just to increase this ratio. - Pay your bills on time
Late payments make a huge (negative) impact on your score. If you have missed payments, get current and stay current. - Make more than the minimum payment
If you make only the minimum payment on your credit card each month, it may take longer than you think to pay off your balance. For instance, say you have a balance of $1,500 on your credit card with the modest interest rate of 14.99% and make $100 in new charges each month. If you pay only a the minimum payment of $125 per month it will take you more than 10 years to pay off your credit card debt. Increasing your monthly payment to $174 per month means you can pay off that debt in 2 years and save hundreds in interest charges. - Don’t open a lot of new accounts over a short period of time.
Having many “inquires” into your credit report and expanding your credit line too quickly may signal to creditors that you’re on the brink of major financial problems. - Pay off credit card debt rather than transferring it
Revolving your debt from card to card keeps your debt-to-credit ratio higher, increases the number of new accounts on your records, and artificially diminishes the length of your credit history because no one account is open very long. Not to mention all of the finance and interest charges you’ll have to pay with all of those new cards… - Review your credit report regularly and correct errors
By federal law, you are entitled to one free copy of your credit report per year from each of the 3 major credit bureaus. Check your credit report at least once per year to ensure that the information on it is yours, and correct.
Your credit score may affect more than you think. Credit scores determine:
- whether you’ll be approved for credit cards, car loans, and student loans;
- what interest rate you’ll get on these loans;
- the cost of your car insurance;
- whether you get that apartment you've been hoping for.
Remember, a poor score costs you more.
- Myth: My score will drop if I check my credit.
Checking your own credit report is counted only as a “soft inquiry” and doesn’t harm your credit at all. Only “hard inquiries”, the one’s made from a creditor or lender when you apply for credit, can bring down your score a few points. - Myth: Once I pay off a negative record, it will be removed from my credit report.
Negative records such as late payments will remain on your credit report for 7-10 years after they are first posted. Paying off the account before the end of the set term doesn’t remove it from your credit report, but will mark the account as “paid.” Your credit score will improve when you pay off your debts, particularly as more and more time passes since the default and the record finally expires. - Myth: My poor score will be with me forever.
Your credit score is just a “snapshot” of your credit risk at a particular point in time and is always changing. That means as you continue to make payments on time and pay down your debt, your credit score will steadily improve with time. A low score now definitely doesn’t mean you’ll have a low score forever. - Myth: Paying off my debt will add 50 points to my credit score.
While we all may wish this to be true, your credit score is calculated using a complex equation taking into accounts hundreds of factors and values. It is difficult if not impossible to predict how many points you can gain by changing one factor, like paying off a debt, but rest assured you will gain points. - Myth: Closing old accounts will improve my credit score.
While many people advocate closing old and inactive accounts as a way from improving credit, it many cases it may actually lower your score, as it may change your debt-to-available-credit ratio and make your credit history appear artificially shorter. If you want to reduce your levels of available credit, ask for your credit limits to be reduced, or close newer accounts instead.
- Make more than your minimum payment on your credit card
For instance, say you have a $1,500 balance on a modest 14.99% APR card, and make $100 in new charges every month. If you made only the minimum monthly payment of $125, it will take you more than 10 years to pay it off. However, if you pay a bit more at $174 per month, you can have that debt paid off in only 2 years . That’s quite a difference. - Pay off your highest interest-rates cards first, then move to the next
By paying as much as you can on your highest interest rate card first and making the minimum on your others, you’ll save money in interest charges in the long run. After you’ve paid off you highest interest-rate card, move to the one with the next highest interest-rate, and so on until you have them all paid off. - Call your creditors and ask for a lower interest rate
Surprisingly, this can work if you can give your creditor a good enough reason for doing so. - Make a budget and stick to it
Sit down with your bills and figure out how much you owe each month, how much you need for expenses (like food), and how much you have coming in. Figure out where you can cut corners in your current spending to make the numbers match. - Revisit your childhood days and bring your lunch
If you don’t have a meal plan, consider packing your lunch for the day instead of eating out. If you’re a coffee drinker, invest in a re-usable travel mug and make your own coffee at home rather than paying $4 a day for your latte. - Get a part-time job or increase your hours
Even an extra 3 hours a week at your current job may pay your cell phone or electric bill. If you don’t have a job, check out campus employment to see if there are any jobs that fit well with your major or interests. Or, try to get a job where you usually socialize and spend money, like the coffee shop (this tactic will not only make you money, but keep you from spending money too!). - Leave your credit cards at home
If you go shopping with your friends or just want to see the latest arrivals at your favorite boutique, leave your cards at home. You can always come back if there truly is something you can’t live without. Also, never buy anything you didn’t intend to before you left home. Impulse purchases can add up in a big way.
While that midnight pizza run or great new sweater may have seemed like a good idea at the time, have you ever thought about how much all those “good ideas” cost you?
Let’s say you charge a $10 pizza on your 19.50% APR credit card your freshman year of college. With all of the other charges and payments you have to make, you don’t make the more than the minimum payment on your card until you’ve graduated and got a job, so the pizza continues to sit on your balance. By the time you pay for your pizza 5 years later, instead of costing $10, it now costs $26. Multiply by that by 15 pizzas your freshman year that cost $150, you end up paying almost $400 .
Paying only the minimum balance on your credit cards can cost you big in the long run. For instance, say you have a $1,500 balance on a modest 14.99% APR card, and make $100 in new charges every month. If you made only the minimum monthly payment of $125, it will take you more than 10 years to pay it off. However, if you pay a bit more at $174 per month, you can have that debt paid off in only 2 years . That’s quite a difference.
Want to calculate how much your paying for your credit card purchases? Check out the Credit Card Payoff and other calculators by myFICO, the company that calculates credit scores. Also see Visa’s Practical Money Skills for Life website for information on how to set up personal budget, as well as how to plan for major life events like college, buying a car, and getting married.
The name is a mouthful but it’s an important one to know: it’s the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), and it became law on May 22, 2009. Its purpose is to give consumers more information and options around credit.
Here are a few things the Act means for customers:
Safeguards Against Rate Increases
Under the Credit CARD Act, rate increases aren’t allowed during the first year, and promotional rates need to last at least six months.
The Act prohibits "double cycle billing," where credit card holders are charged interest on debt that’s paid on time during a grace period.
It prohibits "universal default," where a lender changes a loan to default terms because the consumer has defaulted on a loan with another lender.
After the first year, cardholders must be told about major account changes 45 days before they take effect. New rates can’t start until 14 days after the notice is mailed. The cardholder has the option to cancel the account and pay off the balance at the existing rate.
Improved Billing Practices
The Credit CARD Act gives consumers 21 days to pay their monthly credit card bills (compared to the former minimum of 14 days).
Payment due dates must be the same day of each month, and consumers need to be allowed three weeks between the time a bill is mailed and when it’s due.
Credit card statements need to be in a specific font so they can be read easily.
Fee Restrictions
In almost all cases, consumers can’t be charged for the method they use to pay their credit card bill.
The Credit CARD Act limits fees consumers can be charged for spending over their credit limits.
There are new limits to the fees consumers can be charged on subprime cards (cards with higher rates and fewer rewards).
More Disclosures
Consumers must be told how long it will take them to pay off a balance if they only make minimum payments.
Credit card agreements must be made available online.
Statements need to include the payment due date, the minimum amount due, the ending balance and late fee information.
Protections for People Under 21
Under the Act, people under 21 will only be able to get a credit card with proof they can make payments on their own, or with the help of an adult co-signer.
The Act restricts incentives given to students who sign up for credit cards.
To read the complete Credit CARD Act of 2009, click here.
Source: Credit Card Reform: What it Means for You, the American Bankers Association.
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