Holidays and overspending, how does it affect your credit?

As the holiday season is upon us and we can’t seem to stop spending on gifts and food for holiday parties, a lot of people end up charging a lot of it onto credit cards.  I often see an increase in bankruptcy clients beginning of the year because of all the holiday spending.   To try and help you think twice about charging it, I wanted to give some tips on how to ensure your credit score remains high.  Alternatively if your credit score is already low, some tips on how to repair it.

There are three national credit reporting bureaus: Equifax, Experian and TransUnion.  Credit scores range from 300 to 850.  The average American credit score is about 670.  For ever collection account on your credit report, your score will drop 20 to 40 points.  If your score is good and you file for bankruptcy, your score will typically fall 220- 240 points.  This situation occurs when people haven’t missed any payments yet, but they have maxed their credit cards.  If your score is lower, like you have several collection accounts on there, then your score after bankruptcy will only drop 140-160.  After the bankruptcy, you want to begin working on repairing your credit by getting more credit.   I know those who just came out of bankruptcy are reluctant to do this, but it’s a necessary evil in our economic system.  If you make all your payments, you should begin to see your score move up.  The bankruptcy itself will remain on your report for 7-10 years.  Given the economy tanking in 2007, seeing a bankruptcy on a credit report isn’t as bad as it was simple because it’s more common now.  For example, just two years after a Ch7, you can typically qualify for an FHA or VA loan.

HOW DO YOU ENSURE A HIGH CREDIT SCORE?

Another thing to remember is that your credit score is based on several various factors such as: number of credit inquiries, ratio of available balance compared to existing balance, length of open credit cards, and payment history.

Number of Credit Inquiries

Every time you apply for a credit card, a home mortgage, or sometimes even an account with a cable company, that inquiry goes on your credit report.  If you only have one per year, the effect on your score is low.  If you have several various inquiries, then the effect will be greater.  The idea is to discourage individuals who are just trying to open as many credit cards as possible beyond their means.

Ratio of Available Balance vs. Existing Balance

This factor significantly effects your credit score.  The general rule is to keep this ratio at 29%.  The available balance you have is going to be based on all the credit limits on every single card.  Existing balance is how much of the available balance you used on the cards.  The ratio between the numbers needs to be at 29% as they do not want people to be maxing out their cards.

Length of Open Credit Cards

How long you have had your credit card effects your score.  The longer you’ve had it, the better is it.  There is a way to take advantage of this to help boost your credit score.  If you know someone with a great credit history, and a card they have had for a very long time, adding you as a user on their card will automatically allow you to gain the benefit of those years of good history.  If the person with good credit is concerned, they can always add you and just never actually give you a card to use the account.  Another tip is that you should never close unused credit cards!  If you don’t want to use it anymore because the rates are bad or if you just don’t like the company, then just cut up the card.  Don’t close it.  This way you can continue to benefit from the card being open.  Be aware, this tip doesn’t work if the card has an annual fee.

Payment History

This one is pretty straightforward.  Every time you miss a payment, it’s a negative mark and affects your score.  If you just have missed payments once or twice, it’s not as bad, it’s only bad if it becomes to look like a pattern.  A lot of times if you’ve never missed a payment with a credit card but something happened and you do miss one, you can typically call them and ask them not to report the one late payment.

FREE CREDIT REPORT

Keep in mind that everyone is allowed a free credit report every year.  Be careful because there are a lot of companies out there that pretend it’s free.  NEVER give your credit card information for a free report.  You can go to Annualcreditreport.com to get a report from the three bureaus.  That site is maintained by the government.  You can also go to the three bureau websites to get a free report.  What I would recommend is to spread out the free report you get from the three bureaus.  This way you can monitor if there is any identity theft issues.

CREDIT KARMA

Another good resource is creditkarma.com.  When you get an account, they will allow you to check your credit score anytime you want as well as reports from two of the bureaus.  They have an app you can download to your phone so you can check this information on the go and easily.

I know this is a lot of information and can be overwhelming.  However, it’s better that you know about it!  Too often the biggest problem people have is that their finances make them cringe so instead of addressing it, they stick their head in the sand.  This is the worst possible thing to do because more often than not, my bankruptcy clients could have avoided bankruptcy had they dealt with the issue sooner.

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