There have been a lot of changes in the world of credit cards and credit cards. Some of the changes, like the rise in wage garnishments, are a result of the economic crisis. Other changes are a result of the CARD act that has attempted to reign in credit card company practices to protect consumers. Some things never change and that is that most consumers need a good credit score to have financial security.
What is a good credit score?
The first part of credit score 411 is to understand what credit scores mean. Let’s look at two types of credit card scores.
FICO scores: Range from 300 to 850 and 760 or above is considered ideal.
VantageScore: The scale ranges from 501 to 990, the higher the better.
Once you understand credit score ranges now consumers need to understand how to build or maintain credit scores.
Credit score basics like not over applying for too many credit cards at a time and of course paying bills on time are still important practices. However in some ways the menu has changed and there’s some new food for thought on protecting your credit score.
New Annual Fees or Inactivity Fees? Some credit card company’s reaction to not being able to charge or overcharge some fees was to create new ones.
Do you pay the fees or cancel the card? What will happen to your credit if you cancel the card? Closing a credit card can work against your credit score so what are your options?
One options is to apply for another card that doesn’t have these fees. While in the past, consumers have been warned off against applying for more cards, now experts say you may want to consider applying for a new one if you’re planning to close one.
Even so, you still don’t want to apply for more than one credit card within a six-month period so you’ll have to manage switchovers gradually.
Credit utilization, or how much of your available credit are you using, makes up 30% of your credit score. So having and using no credit cards, actually works against your credit score. Here’s another example of a practice for maintaining and building credit scores that seems backwards.
Balances on Closed Accounts?
Under the CARD Act, interest rate hikes can only be applied to forward balances. If you close account because you don’t want to agree to an interest rate increase or new fee, consider this before paying off the account.
Even if you close an account, the credit limit is calculated into your credit score as long as you have a balance. It seems backwards but actually paying off the entire balance can lower your credit score.
So it is still always a good idea to pay bills on time and not over apply for credit cards, but credit scores can be as tricky as understanding taxes. What seems to be just good common sense, doesn’t always work in your favor if you’re trying to build or maintain a good credit score.
Consider keeping a small balance on closed accounts.
Don’t apply for more than one new credit card within a six-month period.
Continue to pay all bills on time.
Stay “tuned” for our next article on tips for improving your credit score.