Credit Cards 101

  A credit score Is like a grade for how well you handle money. It shows how responsible you are with borrowing and paying back money. A high score means you’re good at it, and lenders are more likely to trust you. A low score means you need to work on it. It’s like a report card for your finances!

Credit scores are determined by various factors, each carrying a certain weight in the calculation. While the exact percentages may vary slightly depending on the credit scoring model used, here are the general factors and their typical weightings:

Payment History (35%): This is the most significant factor and reflects your history of making on-time payments for credit accounts, including credit cards, loans, and mortgages.

Credit Utilization (30%): This measures the amount of credit you're using compared to your total available credit limits across all accounts. Keeping this ratio low, ideally below 30%, demonstrates responsible credit management.

Length of Credit History (15%): This considers the age of your oldest and newest credit accounts, as well as the average age of all your accounts. Generally, a longer credit history indicates greater experience in managing credit responsibly.

Types of Credit (10%): Lenders like to see a mix of different types of credit, such as credit cards, installment loans (e.g., auto loans), and mortgages. Having a diverse credit portfolio can positively impact your score.

New Credit Inquiries (10%): This factor considers how frequently you apply for new credit. Multiple recent credit inquiries can suggest higher risk to lenders, potentially lowering your score.

In the world of credit cards, understanding the difference between your Closing Date and Due Date is crucial.

Your Statement Closing Date signifies the end of your billing cycle, with payment typically due around 25 days later.

    Paying off your balance in full before the statement closing date might seem like a good idea, but it's not always beneficial. If you pay off everything, a $0 balance will be reported, which doesn't reflect credit utilization—a significant factor in credit score calculations. Therefore a reported $0 balance on your statement closing date could negatively impact your credit utilization ratio. Maintaining a credit utilization ratio under 30% is key to improving your score. If your utilization exceeds 30% by the statement closing date, pay it down to under 30% (not $0) before then so it is reported positively on your credit report. 

Your Payment Due Date is the deadline for paying at least the minimum amount due on your credit card statement.

     Remember, leaving a balance after the due date isn’t necessary for reporting purposes. So there is no need to leave a balance on your card after the due date and pay unnecessary interest charges. Pay your card in full by the payment due date If you are able to!

Credit Utilization

A significant portion of your credit score hinges on your credit utilization ratio, defined as "the amount of revolving credit you're currently using divided by the total amount of revolving credit you have available." It's essentially how much of your total available credit you're currently using. For example, if you have a credit card with a $1,000 limit and you have a balance of $300, your credit utilization ratio is 30%.

Maintaining a credit utilization ratio below 30% is pivotal for elevating your credit score. Remember, consistently paying off your credit card balances in full each month is a surefire strategy for boosting your credit score.

Having One vs Multiple Credit Cards

- Contrary to common belief, carrying a balance on your card and accruing interest won't elevate your score. Paying off the balance in full every month yields the same, if not greater, credit score improvements.

- Spending large sums or utilizing multiple cards won't increase your score more than modest spending on one card. The key lies in keeping your credit utilization low and making on time payments, whether with one card or several. Many individuals I know personally have achieved credit scores over 800 with just a single credit card. 

Having multiple credit cards can make it easier to keep your credit utilization low which is why some people may think this. If you keep your credit utilization low with a single card your score will rise just the same as long as they are managed responsibly.

Here's Why,

Credit Utilization: Whether you have one card with a $1,000 limit or ten cards each with a $1,000 limit, if you keep your total balances low (below 30%) relative to your total credit limits it can positively impact your credit score. Managing your credit utilization ratio responsibly is crucial regardless of the number of cards you have.

Payment History: Making on-time payments consistently demonstrates responsible credit management. This aspect of your credit behavior contributes significantly to your credit score, regardless of the number of cards you have.

Credit Mix: Having a mix of different types of credit accounts, such as credit cards, loans, and mortgages, can positively influence your credit score. However, this factor is less about the number of credit cards and more about having a diversified credit portfolio that you manage well.

Credit Age: The average age of your credit accounts also plays a role in your credit score. Opening multiple new credit cards within a short period can lower the average age of your accounts, potentially affecting your score slightly. However, this impact is typically minimal compared to other factors like payment history and credit utilization.

Closing a Credit Card 

Yes, It is Possible to close a Credit Card without your credit score dropping!

When you close a credit card, its impact on your credit history depends on whether the account was closed with positive or negative information. 

The closed cards details will persist in your credit history for 7 to 10 years after closure.

A closed card with Positive Information: Accounts in good standing, including closed accounts with no late payments, can remain on your credit report for up to 10 years from the date they were closed. This positive history can continue to benefit your credit profile during this time.

A closed card with Negative Information: Any negative information associated with the closed account, such as missed payments or defaults, generally falls off your credit report after seven years from the date of the delinquency.

Closing a credit card will reduce your total available credit, which can lead to an increased credit utilization ratio. If you find it necessary to cancel a card, it's advisable to first pay down all your other credit card balances, ideally bringing them to zero. This approach helps to minimize or even avoid any negative impact on your credit score.

Reasons to Cancel a Credit Card-

▷ Too Much Temptation

▷ Separation or Divorce

▷ High Annual Fees (Try to Negotiate with your Credit Card Company Before Cancelation)

 If you find yourself holding onto a card that no longer serves your needs don't hesitate to contact your credit card company to explore switching to a more beneficial card with cashback or rewards tailored to your needs. 

You may be very surprised to see the cashback or rewards you could have been accumulating this whole time!

This approach presents notable benefits such as card switches typically do not require a credit inquiry, thus avoiding any impact on your credit score.

Additionally, in many cases, the transition can occur seamlessly without necessitating a change in card number so your credit longevity will remain intact!

Taking the initiative to explore your options with your credit card issuer can yield valuable insights into the cards you qualify for and enable you to make informed decisions about optimizing your credit card lineup.

Additional tips:

- Negotiate with your credit card companies annually to secure lower interest rates, particularly if you have a commendable payment history.

- Prior to making substantial purchases you may not be able to pay off in full by the due date, inquire about promotional 0% interest rates to lower you interest costs.

- Assess the pros and cons of each card before making any cancellations ( Interest Rates, Annual Fees, Benefits, Rewards, Temptation etc..)

- To avoid complications or cancellation due to inactivity try to only retain cards that align with your spending habits. Try to switch this card to another by the same company without canceling.

Again call your credit card company to see what cards can be upgraded or interest rates Reduced, You may find yourself very Surprised just like i was!

Remember, responsible credit card usage entails spending within your means and paying off balances by the Due Date to evade debt accumulation and paying unnecessary interest charges.

Embrace the journey toward financial well-being, Best of luck, and may these insights pave the way for informed decisions regarding your credit cards!

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