From Ash Cash, personal finance expert, speaker and bestselling author.*
Credit! What is it good for? Some say it’s good for nothing and others say it can save your life! I say that if you are good to FICO then FICO will be good to you. For those who are not familiar, FICO is a credit reporting system started by the Fair Isaacs Corporation. It is a numerical measurement of your credit worthiness that ranges from 300 to 850. Your FICO score is used by most lenders to determine whether you can obtain credit so using it the wrong way can definitely feel like a curse. In fact, because of lack of financial education and the current state of student loan debt, most people may feel like FICO has done nothing but hinder them.
Your score can stop you from getting loans, renting or buying a home, purchasing a car, opening a bank account or even getting a job. Getting a handle on your FICO score is easy if you educate yourself on how FICO. is calculated then discipline yourself.
The five categories that are used to calculate your score are: How much debt you have, your payment history, your debt usage ratio (how much you owe in relation to your credit limit), how far back your credit history goes and your mix of various types of credit.
Understanding these five categories can really help you keep your credit in order. Just in case you’re a part of the 44 million Americans who have fell behind on their credit, there is still hope. The following are five things you must avoid to keep FICO from becoming a curse:
1. Making late payments
Obviously, we should know why this is a big no no but just in case here’s why — Credit is given based on your ability to pay back your obligations on time. making late payments simply shows creditors that you are having a hard time meeting your obligations. Late payments stay on your credit report up to seven years so it’s imperative that you avoid them at all cost. If you’ve made some late payments in the past, it’s not the end of the world. As you continue to make payments on time, the late payments will have less of a negative impact. The key is discipline and showing creditors you are responsible.
2. Carrying big balances
Most people don’t realize this, but creditors usually extend credit to those who they don’t think need it with the hopes that they’ll use it eventually. Carrying a big balance shows creditors that you are having issues and are relying too heavily on the credit to get you by. This has a negative effect on your credit score as well as your ability to obtain new credit. As a rule of thumb, you should keep your usage down to about 30 percent ie: if your credit card limit is $1,000; you should not carry a balance greater than $300.
3. Closing a credit line
Closing a credit line can hurt you in two ways; First as I stated just a few moments ago you want to keep your usage down to 30%. Closing a credit line increases your usage because you no longer have that credit limit available to you. It can also affect you because you may be getting rid of a rich part of your credit history. If you have a card that’s been open for a while and you’ve been making payments on time, it is best to keep that card open. Most people close credit cards because they may have received a new card with a better rate and don’t want to have too much credit outstanding or might be trying to avoid an inactivity fee if they’re not using the card. Keep in mind that you lose more by closing your old cards. The best thing to do is to call your current credit card provider to negotiate a lower rate or fees.
4. Having too many credit inquires
Anytime a creditor checks your credit it effects your FICO score by two or more points. The deduction in points may only last up to two years, but it is still important to use caution. Keep in mind that you can check your credit as much as you want yourself without any effect to your credit score. With that in mind, I suggest that you know your score whenever going anywhere to obtain credit and inform your potential creditor of your score prior to applying to anything.
Defaulting on any type of loan or credit card is the single worst thing you can do to your credit. Defaulting will surely get you declined for any new loans and should be avoided at all cost! If you ever foresee that you can’t meet some or all of your obligations, it is imperative that you reach out to your creditors as soon as possible. Most will be willing to work with you.
All in all, FICO can be your friend if you treat him right. Treat him wrong and he will become your worst nightmare.
*The opinions/views expressed by Ash Cash are not considered opinions/views of BMTX, Inc., a wholly owned subsidiary of BM Technologies, Inc. BMTX is not a financial advisor and individuals are urged to obtain and consult their own financial advisors.