When you’re at the mall giving your credit cards a workout this holiday season please keep in mind how those actions can impact your credit scores. If you’re not sure how they work…here’s a refresher…
1. Payment history comprises 35 percent of your score. It includes payment information by type of account (credit cards, auto loans, and mortgages), presence and number of accounts and whether they are current or past due. It looks at number of severe delinquencies such as charge-offs, bankruptcies, and foreclosures.
2. Amounts owed are 30 percent of your score. This is the amount you owe on all your accounts. One key calculation is how close you are to your credit limit on credit cards or your credit utilization. It is calculated by your total credit card balances divided by your total credit limits.
3. Length of credit history represents 15 percent of your score. This evaluates the age of your accounts.
4. New credit is 10 percent of your score. This looks at the newly opened accounts and how long they have been opened.
5. Types of credit used is also 10 percent of your score. It looks at the combination of revolving (credit cards), installment (auto and mortgage loans), and charge cards (American Express and Diners).
Since the first two categories represent 65 percent of your score, I recommend you concentrate on paying your bills on time and in full. If you can’t pay your credit card bills in full, work to keep your credit balances as low as possible. The ratio of your total credit card balances to your tot credit card limits should be less than 7 percent according to FICO, the inventor of the credit score. This means that you don’t carry over much of a balance during the holidays or if you already carry a balance you need to pay it down.
Don’t open new accounts or at least not more than one during the holidays. I have mentioned my pet peeve regarding retail cards that charge exorbitant interest rates and temp you to apply for the card by offering special discounts that day. If you can’t pay the first bill you receive in full, you will probably pay more in interest charges than you saved by the 15% discount on the purchase.
You won’t keep your score high by paying bills late, using more than 7 percent of your credit limit and opening new accounts. Don’t spend more than you can afford. If you can’t pay the bills off in less than three months, don’t charge it. In addition, you don’t want to be paying 2012 holiday bills in the summer of 2013 or worse…into 2014!
Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. Follow him on Twitter here.