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Your Credit Card Balance Could Be Hurting Your Credit Scores

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Your Credit Card Balance Could Be Hurting Your Credit Scores

Welcome to part 1 of the HOPE4USA.com Credit Card Mastery Series.

In today's episode we will be covering the key ingredient which determines whether your credit cards will help your hurt your credit scores. That key ingredient? It's you.

Credit cards can be powerful credit building tools; however, credit card debt is never good for your credit scores or your wallet. Learn how to take control of your credit card debt once and for all - your credit scores and your wallet will thank you!

Visit HOPE4USA.com or follow us on Facebook during this informative weekly series so that you can learn how to turn your credit card accounts into powerful credit building tools. 

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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What Is Revolving Utilization and Why Is It So Important to Your Credit Scores?

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What Is Revolving Utilization and Why Is It So Important to Your Credit Scores?

If you want to have great credit scores then pay your bills on time every month. The previous statement is great advice; however, it is incomplete. Simply paying your bills on time is not enough to achieve and maintain great credit scores. In fact, only 35% of your FICO credit scores are based upon your payment history. The other 65% of your FICO scores have nothing at all to do with how timely you pay your bills.

30% of your FICO credit scores, plus a significant portion of your VantageScore credit scores, are calculated based upon the "Amounts Owed" category of your credit reports. The primary factors considered within the category are based upon those little pieces of plastic you carry around in your wallet: your credit cards.

What Is Revolving Utilization?

Revolving utilization is a term used within the credit world to describe the proportion of your credit card balances to your credit card limits. Your revolving utilization ratio is also known as your debt-to-limit ratio or your credit utilization ratio. It measures how much of your credit limits are in use on each of your credit card accounts and expresses that calculation as a percentage. Here is a quick look at how revolving utilization is calculated.

Credit Limit: $5,000
Balance: $3,500
Revolving Utilization: Balance ($3,500) Divided by Limit ($5,000) = Revolving Utilization (70%)

Why Is Revolving Utilization Considered in Your Credit Scores?

Your revolving utilization is an important consideration in your credit scores for one very simple and important reason: it is statistically predictive of higher credit risk. When you carry outstanding credit card debt on your credit reports you represent a higher credit risk than someone whose reports show paid off credit card balances.

All debt is not created equal. When you take out a mortgage loan or an auto loan, for example, you are opening an installment account. Credit cards, by comparison, are revolving accounts. Installment debt is much less risky for lenders to extend because the debt is generally secured by some sort of collateral (aka your house or your vehicle) which the lender can seize and resell in the event you stop making your payments. However, credit card debt is different.

Because of the nature of credit card debt, it is much more predictive of increased credit risk than installment debt. Think about it. If you begin to struggle financially due to an illness, divorce, job loss, or even poor financial management habits like overspending, which is the first obligation you will probably allow to slide in the event that you have more bills than money at the end of the month? Most likely you will not skip your mortgage payment, your rent, or your auto loan payment if you can help it. Credit card payments, however, are much more commonly skipped in the event of a financial shortage.

Additionally, increased credit card balances might indicate that a financial problem is looming. If a consumer loses his job then it is very common to rely upon credit cards to help finance every day expenses until a new source of income can be secured. As you can easily see, if your reports show that you are revolving balances on your credit cards from month to month, especially high balances when compared with your credit limits, it might make you appear to be a higher credit risk in the eyes of a lender.

The Good News

Although revolving unpaid credit card debt on your credit reports from month to month will almost certainly lower your credit scores, you can currently regain those lost points rather quickly, as soon as you start to eliminate the debt. The other goods news is that the score increase you may be eligible to earn from paying down your credit card balances and lowering your credit utilization can be earned incrementally (instead of an "all or nothing" scenario). In other words, as you pay down your credit card balances little by little you should begin to experience small credit score increases. You do not have to pay a credit card balance all the way down to zero on your credit reports before you can hope to receive a score boost.

 

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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Will Increasing a Credit Limit Help Your Credit Scores? 
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Why Do the Credit Scores I Pull Look Different Than the Ones My Lender Pulls?
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Where Do Credit Scores Come From?
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Preparing Your Credit for a New Mortgage
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Scorecards: Why It Might Be Impossible for You to Earn an 850 Credit Score

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Scorecards: Why It Might Be Impossible for You to Earn an 850 Credit Score

Credit scores run the world. Okay, maybe that is an overstatement, but the truth is that your credit scores will have a massive influence over your life. In fact, your credit scores exert nearly as much control over the financial quality of your life as does your income.

If you are wise then you already know that learning what it takes to keep your credit reports and scores in stellar shape is a very important goal - one of the most important wealth building goals you can make for yourself. Yet if you are a natural born overachiever and are shooting for the stars with your credit scores you might find yourself a bit disappointed. Achieving the ever elusive perfect credit score of 850 might actually be downright impossible for you right now thanks to a not-so-well known component of credit scoring models - the scorecard.    

What Is a Credit Scorecard?

Behind the scenes of every credit scoring model there are multiple scorecards at work. Scorecards evaluate the information on your credit reports and turn that information into credit score points which are added up and delivered to a lender in the form of a credit score. The way that scorecards evaluate the information on your credit reports is by asking questions - questions such as "Are there any late payments present?" The answers to these questions are known as "characteristics." If the answer to the previous question about the presence of late payments was "yes" then you would earn less points to be added to your overall credit score than those which you would earn if the answer to the question was "no."

Scorecards are the nuts and bolts of a credit scoring system. They set the rules for how your credit scores are calculated. Without scorecards it would be impossible for a lender to ever get a copy of your credit scores.

How Different Scorecards Impact You

As mentioned above, every major credit scoring model features multiple scorecards. Depending upon the information contained in your credit reports you are assigned a specific scorecard each time your credit scores are calculated. When FICO releases a new credit scoring model, such as the most recently released FICO 9, what most consumers and even financial professionals do not realize is that - thanks to the existence of scorecards inside of the scoring model - all consumers credit reports are not graded according to the exact same scale. Instead, scorecards will separate consumers into like or homogenous groups and those groups will have their credit reports scored differently.

For example, there are separate scorecards for consumers who have filed bankruptcy or those who have delinquencies (late payments) present on their reports. There are scorecards for consumers with thin or young credit files (not many accounts) and files for consumers without delinquencies as well. While FICO and VantageScore do not disclose the actual types or numbers of scorecards working behind the scenes of their credit scoring models, it would not be unusual for there to be 10 or more scorecards in existence for a single credit scoring model.

The most common credit scoring range for consumers, especially for the most popular FICO and VantageScore scoring models, is 300 - 850. Therefore, if you ask were to ask most credit experts what is the highest credit score you could possibly earn you would probably receive "850" as an answer. Not so fast. 850 may be the highest credit score available, but that does not necessarily mean that an 850 is available to you, at least not at immediately. If you have a bankruptcy on your credit reports, for example, then you would find yourself being scored by a bankruptcy scorecard.

Scorecards designed for those with derogatory information do not have the same maximum credit score possibility, 850, as those scorecards without any derogatory information would have. As a result, if you did have a past bankruptcy on your credit reports then achieving an 850 credit score would be impossible for you until the bankruptcy (and any other derogatory information) was removed and your report was able to be scored by a scorecard which actually included an 850 maximum credit score as an option.

hope-4-usa-credit-expert-michelle-black - Copy.jpg

Michelle Black is an author and leading credit expert with over 13 years of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars up and down the East Coast. 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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5 Perks You Can Land If You Have Great Credit Scores

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5 Perks You Can Land If You Have Great Credit Scores

Everyone loves earning perks, benefits, and bonuses, right? Credit card reward programs, brand loyalty programs, and even grocery store discount cards are built upon this very concept. However, while most people can easily recognize the value of a credit card rewards program there are still many consumers who do not see the value of having high credit scores in the same light. That is a costly mistake.

The truth is that great credit scores can help you to score a lot of awesome perks. Check out the list below to help you start viewing the potential value available to you by maximizing your credit scores.

1. Saving with lower insurance premiums.

When you have excellent credit scores you can secure lower interest premiums. You may not be aware of this fact, but insurance companies routinely check credit scores when you apply for a new policy. In fact, your credit scores can even be more important than your driving record when it comes to determining how much an insurance company will charge you for an auto policy.

Earning great credit scores can pay off every single month in the form of money saved on insurance premiums. If your credit has improved since you took out your current insurance policy then it would be very advisable to talk to your agent or shop around to see if you now qualify for a better price on your insurance coverage.

2. Saving on deposits.

When you open a new utility account it is often common practice for the utility provider to check your credit in order to determine whether or not you will be required to put down a deposit for service. As a result when you apply for new electric service, gas service, cable service, or internet service having less than stellar credit scores can cost you. Additionally, when you apply for a new mobile phone account your credit will again be consulted not only to determine whether or not you will be required to put down a deposit for service but to also see whether or not you qualify for a new account at all.

3. Saving interest costs every month.

Did you know that financing a home with a questionable credit rating could realistically cost you nearly  $85,000 extra over the course of the loan? Purchasing a home with a credit score of 620 could cause you to pay an extra $235 per month on a $300,000 mortgage compared to what someone with a credit score of 740 would likely pay for the same loan. Over the entire course of a 30 year mortgage that is an extra $84,600 you would pay - a pretty expensive penalty for not having great credit scores.

If you have already overcome credit issues and have rebuilt great credit scores then you should take a look at your current loans (i.e. mortgage, auto, credit cards, personal loans, etc.). You may just qualify to refinance some of those loans at a lower rate and save yourself a bundle on interest.

4. Saving on vacations.

Having great credit enables you to land better credit card offers. Many credit cards offer exciting perks such as 0% interest on purchases for 12 months, generous airline reward miles which can be redeemed for free airfare, or even 0% financing with a specific resort or cruise line. However, the most attractive credit card offers are generally reserved for those consumers who have excellent credit scores. Achieving excellent credit scores can open the doors for you to cash in on some amazing vacation deals.

5. Saving face.

If you have ever applied for financing in the past and been turned down then you probably can recall a vivid memory of the red hot embarrassment which crept its way up your face when you heard the words, "I'm sorry, but your application was denied." Simply put, bad credit can be very bad for your self esteem and your sense of self worth, especially if you are the primary bread winner for your family. It is well worth the hard work required to build better credit scores just for the pay off of the added confidence you will receive once you know you never again have to worry about being turned down due to bad credit.

Earning Better Credit

It is completely possible to start earning better credit right away. However, just because it is possible does not mean that the process is easy. Earning better credit takes a solid plan, hard work, consistency, and patience. In fact, it is very advisable to seek the help of a reputable credit professional.

CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA credit expert. Our team can help you build a plan to achieve the better credit you deserve - either on your own or with our help every step of the way. You can also CLICK HERE to download our free HOPE4USA Credit Repair Tool Kit. 

hope4usa-michelle-black-credit-expert

Michelle Black is an author and leading credit expert with over 13 years of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars up and down the East Coast. 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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