Remember that one time when you were in that department store buying a bottle of fragrance, and in the middle of the transaction the salesperson said, “And if you sign up for our credit card, we’ll give you 10 percent off your purchase.”
You said, “Sure, why not? I’ll sign up.”
But now months — or even years — have passed, and you haven’t used that credit card since then. You happen to check your credit score online, and you wonder why it’s not as high as you thought it would be. You’ve made your payments on time, and you’ve kept your balance at a reasonable level.
Smelling so good should never cost this much.
“Store credit cards are not bad, but use them,” says Zak Bolick, credit analyst at Douglas County Bank, 300 W. Ninth St. “If you have a GAP card, for example, and you shop at the GAP a few times a year — even if you could pay cash — you ought to use that card, and then pay it off when the bill comes.”
Bolick says inactivity can be harmful to your credit score. He recommends closing all inactive cards while keeping one or two that you are going to use.
“You want to have revolving credit that you’re using, and that you’re effectively managing,” Bolick says.
Your FICO score, the most widely known type of credit score, is calculated from several different credit data in your credit report. According to myfico.com, it is based on five categories: payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent) and types of credit used (10 percent).
The Web site suggests if you’ve been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score. Also, rapid account buildup can look risky if you are a new credit user.
Timely credit card payments will, of course, improve your credit rating, but doing so while maxing out your credit cards out can hinder it.
“Say you have a credit card with a $10,000 limit. If your balance is $9,999, your credit score’s going to go down, whereas if you have a balance of $2,000, you’re showing you can use your credit responsibly,” says Derek Bailey, loan officer and credit analyst at Lawrence Bank, 3500 Clinton Parkway. “That’s probably the biggest thing people don’t understand.”
As a rule of thumb, keep your credit card balance below a third of your limit.
Patrick Brown, founder of Abram Brown Financial Consultants, LLC, 3227 Huntington Road, says it normally takes six months of diligent on-time payments to show an improvement to your credit score. And in today’s economic climate, those six months can put you ahead of the pack, or behind it.
“It’s very crucial to try to maintain that credit because once we get out of this recession, it’s going to play a major factor in people refinancing their homes,” Brown says.
It’s common for people to lose contact with their lender when they start having trouble making payments, Bolick says. The lender’s ultimate goal is to get paid, so she’ll work with you to prevent late payments from hitting your credit report.
Working with clients has proven to Brown that it’s not so much the amount of money you make that affects your quality of life, but the amount of debt you have.
“People in general have a tendency to live outside their means,” he says. “Just live within your means, and you’re going to be all right.”