How Credit Card Use Affects Your Fico Score

I was doing a little research recently that revealed the average middle-class American household carries between $6000 and $11000 in buy cloned credit cards online debt, depending upon who you choose to believe. Each household also had an average of 5.4 credit cards. In 2006, 173 million Americans were credit cardholders and that number is expected to increase to 181 million by 2010.

As you know, your FICO (Fair Isaac & Company) score is a used as a prime indicator of your credit worthiness and plays a crucial role in your ability to obtain credit. This includes anything from credit cards to auto loans and home mortgages. As potential lenders view it, the higher your FICO score the better risk you are when it coming to extending credit. A higher score indicates a higher likelihood of repayment while a lower score indicates a lower likelihood. With so many Americans holding so many cards and carrying such large balances, it is important to understand exactly how credit card usage, or misuse as the case may be, may affect your FICO score. Here are a few things you should know.

This may seem like stating the obvious but the importance of making your payments on time cannot be overstated. Your payment history is the single largest factor used (about 35%) to determine your credit score. Payments made 30 days or more late can be and usually are reported to the 3 major credit reporting agencies (Equifax, Experian and Transunion) and have a negative effect on your FICO score.

As of April 2009, 15% of Americans or about 34 million people had made late payments in the previous 12 month period. A full 8% or 15 million people had missed a payment entirely. With the economy in its current state and unemployment on the rise it is not likely these statistics will improve anytime soon. So if you find yourself in this situation, you can take a little comfort in knowing you are not alone.

So, always do your best to make your payment on time. You should leave yourself a pad of several business days to insure your payment has time to clear before the due date. Many lenders have a zero tolerance policy and being late by even one day can result in substantial interest rate increases and late fees.

Always try to make more than the minimum payment. By paying the minimum only, you are greatly extending your repayment period and the amount that you will be paying in finance charges. Current credit standards require minimum payments equal to 1% of the outstanding balance plus interest charges. Assuming a 20% interest rate that means the debt will double in 5 years. Making the minimum payment only will require over 8 years to pay off and you will have paid 160% of the original amount in interest!

Also, making minimum payments raises a red flag with the credit card company. It signals that you may be in credit trouble which puts you at greater risk of being unable to repay your debt. As a result, the credit card companies may raise your interest rates.

If you are having trouble making your payments, contact the credit card company immediately. It may be a little humbling but you will usually find they are willing to work with you in developing a repayment plan you can afford. It is usually in their best interest to keep you as a customer whenever they can. Ignoring them will only cause matters to worsen. When my wife was laid off, I contacted VISA and they cut my monthly payment in half and lowered my interest rate from 18.9% to 7.9%.

The second most important factor in determining your FICO score is the total amount of outstanding debt you have. Even If you make more than minimum payments in a timely manner, carrying large amounts of credit card debt makes you less likely to repay and can result in a ding to your FICO score. Make a point of not acquiring any new debt and paying down what you do owe.

Also, make sure you do not owe more than 50% of your credit limit to any one card and not more than 33% of your limit on all cards combined. Historically, this has accounted for around 30% of your FICO score but it has been receiving increased emphasis since 2009. It may even replace your payment history as the largest single factor.

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