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Tackling Your Holiday Credit Card Debt

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Tackling Your Holiday Credit Card Debt

You may have began the holiday season with a firm conviction: I will not overspend this year. I will only spend what I can afford. I will not go into debt. Yet the truth is that despite the best intentions, we Americans are notorious for digging ourselves into big financial holes during the holidays.

If you find yourself wanting to run away and hide from your impending credit card statements, this article was written specifically with you in mind. It is too late to undo the damage your holiday spending sprees may have caused, yet that is no excuse for wallowing in self pity for the next few months and allowing the damage to fester.

Excessive credit card debt can place a burden upon you financially and can damage your credit scores as well. As a result, it is important for you to take action immediately so that your credit and your finances can start to recover.

Make a List, and Check It Twice

The first component in your post-holiday recovery plan needs to be a detailed list of the damage which has already been done: aka a list of your outstanding credit card balances. You should begin the list by writing the smallest balance at the bottom and working your way upward. Here is an example to help you get started.

·        ABC Bank Card: $2,000 Balance

·        XYZ Bank Card: $1,500 Balance

·        QRS Bank Card: $800 Balance

Start at the Ground Floor

Credit card debt harms your credit scores even when you make all of your monthly payments on time. The reason why credit card debt can cause so much credit score damage is because 30% of your FICO credit scores are largely based upon your revolving utilization ratio (aka your credit utilization). Your credit utilization is basically the relationship between your credit card limits and your credit card balances. The closer your balances climb to your limits the worse the impact will be upon your credit scores.

Credit scoring models like FICO and VantageScore pay attention to the credit utilization ratio on all of your credit cards combined and also to each of your credit card accounts individually. This means that each time you pay a credit card account off you will probably see at least some credit score increase. In fact, when you pay a credit card balance down by even a mere 10% you might begin to see some positive credit score movement.

By paying off your lowest credit card balances first you may be able to bring about a positive increase in your credit scores more quickly. For example, paying off the $800 on the card with the smallest balance in the example above (QRS Bank) would probably help your credit scores more than if you paid the same $800 on either of the cards with the higher balances (ABC Bank or XYZ Bank). Starting at the ground floor and working your way up as you pay off your credit card debt will give you a lot more bang for your buck.

A Commitment to Change

The most important step you can take as you work toward eliminating your holiday credit card debt is to resolve to break the bad habit of overspending once and for all. In fact, if you will cut your spending in other areas you could free up additional funds to help you wipe out your credit card debt much more quickly. Paying off your credit card debt may not be easy and no one ever said that cutting spending is fun, but making a positive financial change is worth the sacrifice. Take control of your finances so that your finances won't control you.

 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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How Credit Scoring Actually, Really, Truly Works

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How Credit Scoring Actually, Really, Truly Works

Credit scoring is a complex process, a process driven by secretive software systems that are designed to evaluate the information contained in your credit reports and assign your credit scores based upon that data. If the information on your credit reports shows that you pose a higher risk to lenders then a credit scoring model will assign you lower credit scores. It probably will not come as a shock to you that higher credit scores can benefit you tremendously while lower credit scores can ultimately cost you a lot of money and cause a lot of unnecessary stress.

The unfortunate truth is that if you consistently struggle with poor credit scores then you could easily pay hundreds of thousands of extra dollars in interest over the course of your lifetime for your mortgages, auto loans, credit cards, and personal loans. For this reason, among others, it is a wise idea to learn everything you can about how credit scores are calculated and then use that knowledge to earn the best credit scores possible for yourself.

Credit Scoring by Category

Your FICO credit scores, the scores which are most commonly used by lenders, can potentially range from a low of 300 points to a high of 850 points. Altogether that means that you have up to 550 points up for grabs whenever a FICO scoring model calculates your credit scores. These 550 potential points are broken down into 5 separate scoring categories.

1.      Payment History - 35% (or up to 192 available points)

2.      Amounts Owed - 30% (or up to 165 available points)

3.      Credit History - 15% (or up to 82 available points)

4.      Mix of Credit - 10% (or up to 55 available points)

5.      New Credit - 10% (or up to 55 available points)

*The points above are given for example purposes and are not exact.

For more information about these 5 credit scoring categories check out our previous article, Where Do Your Credit Scores Come From?

How You Earn Credit Score Points

Most consumers have a completely inaccurate view of how credit scoring works. For example, one of the most common questions I receive as a credit expert goes along the lines of "Michelle, how many points will "X" lower my credit scores?" or "How many points will I lose because of "X" action?" However, the idea that any action or item on your credit reports will lower your credit scores is actually incorrect due to the fact that credit scores are always built from the bottom up.

When analyzing the data on your credit reports credit scoring models like FICO will ask a series of questions (aka characteristics) about your credit report and the answers to these questions (aka variables) will ultimately determine the credit score you are assigned. Here is a hypothetical look at how the process works in reality:

The Question (aka Characteristic)
What is the age of the oldest account on the credit report?
The Answer (aka Variable)

·        Less than 1 year old: 40 available points

·        1-2 years old: 50 available points

·        3-5 years old: 60 available points

·        5-10 years old: 70 available points

·        Greater than 10 years old: 82 available points

*Hypothetical variables and point values were used in the scoring sample above.

There are quite a few other factors considered within the "Credit History" category of your credit reports as well, so the example above is really an oversimplification. However, it does serve to give you a better idea of how the credit scoring calculation process operates.  

This question (characteristic) and answer (variable) exercise is repeated over and over again by the credit scoring model until all of the factors considered from your credit report have been completely analyzed. Next the points you earned above (based upon the variable which applied to your credit report) would be added to the points earned from the other credit categories and finally totaled together to come up with your overall credit score.

·        Payment History Category = 150 points earned

·        Amounts Owed Category = 120 points earned

·        Credit History Category = 60 points earned

·        Mix of Credit Category  = 30 points earned

·        New Credit Category = 40 points earned

·        Overall Credit Score = 700 (Remember, your scores begin at 300, not 0)

The Story Continues - Scorecards

Now that you have seen a hypothetical example of how a FICO credit score might be calculated, it is time to complicate the story even more. Credit scoring models also have another component known as "Scorecards." Scorecards make up the framework or skeleton of any scoring model. They separate consumers into like or homogenous groups and each group is scored a little bit differently than the other. Therefore, if your credit reports are being scored by a scorecard designed for consumers who have filed bankruptcy you would not be eligible to earn as many points in each category as you would be eligible to earn if your reports were being scored by a scorecard designed for consumers with no derogatory information (aka clean files). For more information about scorecards, click here.    

Feeling Overwhelmed?

As mentioned above, credit scoring truly is a very complex process. However, what is simple to understand is that credit scores are generated solely based upon the information contained within your credit reports. Therefore, if you maintain credit reports which are free from negative information, keep your payments on time, and keep your credit card balances paid off monthly then you will be well on your way to credit score success. Understanding how credit scoring works is important, but as long as you focus on developing healthy credit management habits you can achieve and maintain the good credit rating you desire.   

Need help overcoming past credit problems? CLICK HERE to schedule a professional credit analysis with a HOPE4USA credit expert today.

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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