Credit Card Health Check- Living Financially Healthy Edition
Credit cards sometimes get a bad rap. Contrary to what some ‘experts’ say, it is possible to be financially healthy and still enjoy the benefits (travel rewards, cash back, concierge services) that popular credit card programs provide. It is important, however, to have a keen understanding of your account terms as well as insight on how your card usage affects your credit score. Here are a few things you should consider to achieve optimal credit card health and reach your financial goals.
Since your payment history makes up 35% of your credit score, you simply must make paying your credit cards on time a priority. Late payments can lead to fees and increased interest rates, negating the benefits of the bonuses and purchasing power that make credit card usage viable. And, once an account reaches 30 days late, it can be reported to credit agencies, likely lowering your credit score, which will in turn affect your rates and borrowing capacity going forward.
If you find that you are only able to make the minimum monthly payment, this may be a sign to review your monthly spending plan. Your credit card bill will show you just how long it will take to pay off while only making minimum payments versus paying more towards your balance each month. If we want to be financially healthy while still taking advantage of credit cards, you may need to evaluate what changes could be made to help you pay more than the minimum.
Credit Limits & Utilization
The percentage difference between your available balance and card limit is known as utilization rate. Since account balances contribute 30% of your credit score, having a high utilization rate on your credit account can negatively affect your credit score. Whether its heavy usage on one card or even moderate usage across several, having collective balances around 40% of your maximum limit will begin to drop your score. Be aware of your balances and maintain them below a 40% utilization rate to help keep your credit score in a more favorable position.
Fees vs Benefits
Does your credit card charge annual fees? Sometimes, a credit card with a ‘premium’ rewards program will charge an annual fees. These can be as low as $50 and rise into the hundreds. Even if you haven’t been charged a fee previously, sometimes creditors will waive the fee for the first year, so keep an eye on your statements. If you know you’re being charged an annual fee, be sure to review whether or not the benefit value gained from having the card exceeds this built-in cost.
Similar to reviewing the value of your benefits versus any fees being charged, it is important to keep an eye on your rates. If you are carrying a balance it is important to review the current annual percentage rate that is being charged. Most credit cards have variable rates, so if you don’t check them frequently, you could find yourself paying more interest and negating the benefits you’re earning. As with the fee discussion, some creditors will also offer an introductory rate to entice you to apply for their card; if this has happened in your case, you’ll want to be mindful of the regular rate when using that card or carrying a balance. Finally, if you’ve had a late payment, you may find yourself being charged the maximum allowable rate as a penalty and need to take additional action (calling the creditor, paying off the account, closing the account) to return to a more optimal financial state.
If some of these areas are concerns of yours, or if you would like some personal expert coaching on your credit card health, please contact one of our certified credit union counselors here at [email protected] and one of our counselors will reach out to you and set up the appointment.