This time of year most of us spend a lot. We have big dinners to celebrate the season and the New Year. Parties and festivities abound. For shopping malls and online retailers this is the busiest and most lucrative time of the year. Boxing day sales are too good to pass up and eat up our disposable income and heavily use our credit cards. For some it may also be time to pay your home and car insurance as well. When our bank account is low it is a great thing to have credit to rely on to get through these expensive times. Keeping good credit is very important in order to access these additional funds.
How do balances on credit cards effect our credit score is the topic for today.
When we use our credit cards to help us through this time of year one can wonder how could it be possible without them? We become dependent on these revolving accounts to keep us going and spending. Most of us do not save money through out the year to pay for these additional expenditures. In Canada the ratio of debt to household disposable income is at an all time high and the trend is not likely to stop any time soon. Lending rates continue to be very low and give us a some sense of security knowing the cost of borrowing is small. If you have secured low rate lines of credit to use when you rack up the credit cards then you have a security blanket of sorts to protect your credit. What happens when you don't have this low interest net to fall back on? What happens when you decide to skip a payment or go over your limit?
The top most negative credit score factors are:
- Serious delinquency
- Serious delinquency, and public record or collection
- Time since delinquency is too recent or unknown
- Level of delinquency on accounts is too high
- Number of accounts with delinquency is too high
- Amount owed too high on accounts
- Ratio of balances to credit limits on revolving accounts is too high
- Length of time accounts established is too short
- Too many accounts with balances
These are the major factors that will cause your credit score to fall. Even if you make all your minimum payments on time (within 30 days of due date) your score can still plummet. Having high balances increases your propensity to go bankrupt, increase your debt service ratio and your credit utilization which will seriously affecting your score. These negative factors take a long time to fall away and limit your ability to access cheap rates and desirable terms.
Banks have automated systems that score your application for credit. The credit bureau score is the most important factor in this scoring system. Once your score is presented, you and your application is calculated. There is little that can be done to change the banks decision. The days of your local bank manager having done all our family loans for years and giving you the benefit of doubt is gone. Things like job security, net worth and debt service ratio are important but pale in comparison to that all important FICO or Beacon score generated by Equifax or Trans union.
The best credit advise is to know what your credit score is and have a plan to protect it. If you throw caution into the wind and spend without stopping to think, you will eventually have to deal with the down side of having less than perfect credit. Be prepared and spend wisely.