One of my favorite forms of credit is store promotions that offer 0% interest for some time, typically 3 to 12 months, for larger purchases. These are also called "same as cash" promotions. A general recommendation is to set this money aside in a savings account. Divide the amount owed by the number of months out and budget accordingly. If you are planning a large purchase, this sort of budgeting can also be done prior to the purchase to make it more reasonable.
Credit cards can also be useful when awaiting reimbursement. However, it is still good to pay what you can because interest rates on credit cards tend to vary from the initial (low) rate to an adjusted (and extremely high) rate. A general rule to determining how much money a month is going to interest is to divide the APR by 12. It is a very rough estimate, but it can clue you into the cost of merely having your balance. Some cards can carry a 28-40% interest rate, so if you must carry a balance, try to move it to your lowest rate cards.
When determining how to utilize your spare income at the end of the month, stack your payments according to interest rates. If you have an investment earning a return higher than your debt, then invest there. If not, then pay down your principal on your debt. Certain debt is "good" debt (education, mortage) so pay down your other credit debt first.
After some discussion with a friend about credit ratings and scores, here are some pointers:
- If you use credit cards that carry a balance, about $200 balance per month helps your credit rating. If you always pay down your balance every month, you're actually not improving your score. Conversely, if your cards are near their limits, then your score will likewise be lowered.
- Every time someone pulls your credit report, your score could be affected. It takes about 11 credit checks per 12 month period. Therefore, if you are shopping around for a bank or home lender, it is wise to carry a copy of your credit report with you.
- Know your interest rates and what you can do to change them. For example, most credit cards will let you keep your low introductory rate if you are always on time with your payments.
3 comments:
I think there's something about credit to debt ratio that goes into the calculations for credit rating, but I'm not sure how it affects the score. Anyone else know?
Just wanted to add that if you are searching for a home loan, you want to look within a 2 week period. All pulls within a two week time period count as one pull. This way you can get the best deal on a loan, but not hurt your credit score.
I don't know the exact calculations involved with debt-to-credit/income ratio, but those are involved. A good site to estimate your FICO score (credit score) is www.myfico.com There's an estimator on there you can use and it's fairly accurate.
Just a small comment--I have always paid my credit cards in full every month, and my credit score is *very* high. In my experience, it's not necessary to pay interest and carry a balance to manage your credit score. Perhaps if you've previously had problems and need to raise it, it would help.
Another tip--lots of people who feel uncomfortable with credit limit themselves to one card, but credit card management may involve having multiple cards. For instance, use one card for expenses you know you will pay off every month, or expenses you will get reimbursed for before the bill comes, and a different card (that low-interest one) for emergencies when you might need to carry a balance. This lets you take advantage of the convenience of a credit card, and of the interest-free loan that you get when you pay a credit card in full every month, but minimizes the amount you are paying interest on.
For cards that you pay in full every month, also know your statement ending dates. If your bill is issued on 20 April, and you charge a hotel on 22 April, the hotel will show up on the 20 May bill, and will not be due until 15-20 June. By that time, you've gotten the reimbursement check. This ONLY works for cards that you pay in full every month, but can be useful.
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