Baby boomer, are you embarrassed of your credit score? Studies show that a lot of people are more embarrassed of their credit score than by other personal issues – say, their weight. But, when it comes to spending, people seem to ignore the idea of control.
How is it that when you go out shopping you seem to forget about the balance in your plastic? It’s because buying is emotional. And, when it comes to buying decisions, emotion overpowers logic.
Dealing with the urge to overspend is hard for a lot of people. In fact, psychologists say it’s some form of addiction. Studies show that between 2-5% of adults have a shopping addiction.
(By Psicosociales – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=49595625)
Shopping addiction is directly linked to compulsive spending. It is believed to be caused by the need to enhance social status. In some cases, it is caused by neurotic tendencies. People with neurosis use shopping as an outlet to lessen negative emotions. It is now very popularly known as “shopping therapy.”
Materialism and the Internet
In advanced cultures, where people have this kind of “show off” mentality, materialism is condoned. People tend to buy things like clothes to show off their class. Or, fancy cars, and electronic equipment because it makes them feel good. More often, such purchases are unnecessary.
This tendency has been aggravated by the internet because of the ease and convenience of buying online, and anonymity.
This may not be true to you, but at some point – like for most normal people – you get the urge. When it comes, talk to yourself and appeal to the normal person in you.
So Now Let Us Address the Issue of Your Credit Score
There are five factors that impact your credit score: the amount you owed, length of credit history, credit mix, new credit, and payment history.
1. The amount you owed. This factor is worth 30% of your credit score. Needless to say, it is a very significant factor. It has to do with how much of your credit line you have utilized. If the amount you owe is more than 50% of your credit limit, this could adversely affect your credit score. It is good to have the amount you owe under 30% of your credit limit.
In fact, those in the know say it is better to have it at 10%. You might say, “it’s a bit under-utilized at that level.” But, if you have other cards, you can use them, keeping in mind to keep their balances at least at the 30% level or lower.
The one thing you should never do is maxing out your credit limit. Doing this would raise red flags, and lenders would see you as a high credit risk.
2. The other very significant factor in your credit score is payment history. This factor while very significant is the easiest to control. In simple terms, you just need to pay your balance due on time every month.
What you may not know is that late payments could stay in your credit record for as long as a bankruptcy, sometimes as long as seven years.
What the lenders will see is that you are an unreliable credit risk. And, how the system works is that the bad risks are punished by higher interest rates, and the good ones are rewarded by lower rates. And, this puts the delinquent card holder deeper in the rut.
Another thing is that late payments are slapped with a up to 28% penalty interest in addition to huge late fees.
So, whatever you do, never ever forget you monthly credit card or loan payments. If it is available to you, set your online payments to autopay, so you don’t miss a beat.
3. Length of credit. This factor has to do with how long you have been in a credit relationship with your credit card company. So, if you’ve had like – say ten good years with a credit card company and you’ve shown that you’re a credit worthy customer, they just might reward you with a lower APR.
To keep this factor at the positive level you should continue with your good paying habits, and as much as possible avoid switching credit card companies as often as changing clothes.
If you feel like you deserve a lower APR, arm yourself with details of your impeccable history, check out the competition whose been sending you offers of lower rates in the mail, and call your credit card company and ask for a lower APR. Studies show that 78% of those who asked for lower APRs got their rates reduced. (Survey: Creditcards.com)
4. Credit mix. This factor refers to the different types of credit you’ve had experiences with over a period of time. The two general types of credit in the mix are the credit card or revolving credit and the loan accounts or installment credit.
Installment credits are predictable because the payments are fixed on a gradually declining balance over a period of time. Revolving credit on the other hand can fluctuate dramatically from month to month. It all depends on how your financial management practices required for each type figure over the long run.
For example, if you’ve never had revolving credit and have only installment loan, and then you open a credit card account, this new obligation can impact your ability to pay on time. Or it could be the other way around. You only have revolving credit and then you decide to buy a house. Your ability to pay can be greatly impacted by the new credit.
Any departure from your usual paying patterns is what the credit bureaus are watching out for. It is the reason this factor has been set in place. Generally, if you have both types of credit in your mix and you’ve shown a good track record, you would be good.
However, if you’ve never had any experience having both in your mix you should consider the effects of having both.
Consider doing the following:
a) If you intend to add new credit to your existing mix pay off existing balances first before taking on new credit or loan payments.
b) If you intend to buy a home or a car within the year or the next, don’t open any new accounts. If you’ve paid off your mortgage, think twice before refinancing.
c) Base your decision on your need for the new credit or loan account, not on how it will improve your score. Think of the other significant factors and how they will impact your ability to pay. (Source: Creditcards.com. Extracted: 11:05 am, 06/14/18:non-verbatim)
Some people tend to ignore the credit mix factor because of its small percentage but you cannot afford to play around with your credit score.
5. New credit. This factor refers to how often you take on new credit over a period of time. The wise move here is simply to limit the number of your credit cards.
Remember that store cards are credit cards. Don’t think that just because you only have two major credit cards you’d be fine. But, if you have cards of all the major stores in the mall you frequent, you’ve got another think coming.
It is your ability to make good on all your monthly dues that matter, not the number of major cards you have.
At any rate, what matters is the frequency of your taking on new credit over a short period of time. Experts warn about opening multiple accounts within a year.
Every time you apply for a credit, the credit card company sends out an inquiry, and this could adversely affect your score. So, if you apply to three credit card companies within a year your credit score got dinged three times. Think of what would happen if you applied for six in a year.
Safeguarding your credit score is important in a society that runs on credit like America. Without good credit, your financial mobility is badly hampered. Take positive measures to either maintain, or improve your credit score.