Credit Scores.
It’s perhaps the most asked for topic we get in the Financial Coaching space.
Well, not asked for. People think they know all about it, until we start to talk about how it works. Then folks get really interested.
The thing that gets the most attention is the emphasis placed on credit usage. This does not mean what you think it means. [Thank you Inigo Montoya!]
The credit usage portion of the score is a very simple thing. Use more than 30% of your available credit, and your score goes down.
You read that right. Use more than 30% of the credit you have been told you are good for, and your score drops. So if you carry a balance, and add charges, and all of that adds up to more than 30% total credit you have, you are hurting your score.
Hurt your score, and borrowing money gets more expensive. Insurance can get more expensive. You might even be turned down for a loan, depending on how much you’re over 30%.
Here’s the other eye opener: you can and should pay off the entire balance of the card every month. This does not hurt your score. It actually can rocket you to a higher score, and gives you access to credit at zero percent interest.
What was that, you ask? If you pay off the entire balance of a card every month, you are using credit for 0% interest. The interest does not start to be applied until the second month, when it becomes an actual unsecured loan.
And.
This does not drive down your score, but actually can raise it up a bit, because you are not using any space in that 30% usage box.
So, is it possible to get to a point where you are paying off every month?
It depends.
There are times where the card debt gets to be more than you can cover in a month. The trick is to work to get it to a manageable level while still paying other bills. It is trying to fill in a hole without digging a new one.
This is where budgets come into play. Spend on purpose, save on purpose.
That’s a different topic though. This is about using credit.
If there is a need, and it makes sense, then use it. That is what it is there for.
That said, it is just as important to cover the bills and pay off the loan. Credit cards are the most expensive loans you can have, so paying them down and paying them off is the best way to getting out of financial tough spots.
If you need help with this, reach out to a financial advisor or coach. Lots of financial institutions have them. The consultations are probably low or no cost to you.
So, to sum up – your credit score goes up if you use less than 30% of your max total credit. Good credit score helps with other things like insurance, not just loan rates.
Spend on purpose, save on purpose.