Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential credit worthiness. Generally speaking, the higher your credit score, the less of a credit risk borrowers will perceive you to be. If you have a low FICO score, then you could be deemed a higher credit risk. Having a high credit score will help you secure a loan for a car or home, and will also help you get more favorable terms than if you had a lower credit score.
The Fair Isaac Corporation, the creator of the FICO score, does not reveal the exact way in which they arrive at each individual FICO score. The company does, however, detail the different weights they assign to different aspects of a person’s financial situation. Your payment history makes up 35% of your FICO score, while your total debt owed amounts to 30% of your final FICO score. Making up the final 15%, 10% and 10% of your FICO score are the length of your credit history, any new credit that you have taken on, and the type of credit you have used.
When calculating your individual FICO score, the number of credit cards that you have will influence the smallest weighted category: the type of credit that you use. Although this is given the least weight in the FICO score calculation, this is not to say that the number of credit cards you have will not be important. The more credit card accounts you have, the more credit you will have available to you. If you were to run up your debt, this could leave you unable to pay for any new loans you agree to. Therefore, if you have fewer credit card accounts, you will have less credit available to you, which will increase your credit score. However, responsibly managing a small number of credit cards can allow you to possess a better credit score compared to someone with no credit cards, because the lack of a consistent payment history is considered to be riskier.
Note: There is a catch in this process; people who tend to carry a balance on their credit cards instead of paying them off every month will have a higher credit rating than those who wisely avoid interest payments. The reason for this is that credit card companies want to make money, and they only make money off of individuals who pay interest. This means that people who can’t afford to pay off their accounts in full may end up getting more deeply in debt because their high credit scores allow them to access even higher credit limits and more types of credit.
Consumer debt instruments allow people to borrow money at specific interest rates. In recent years, the credit industry has become very imaginative in the creation and marketing of consumer debt instruments and, as a result, there is a lot of overlap between debt and non-debt instruments.
By definition, all credit cards are debt instruments. Whenever someone uses a credit card for a transaction, the card holder is essentially just borrowing money from a company, because the credit card user is still obligated to repay the credit card company. Credit card companies generally make money off of credit cards by charging high interest rates on credit card balances.
Debit cards, on the other hand, are not debt instruments because whenever someone uses a debit card to make a payment, that person is really just tapping into his or her bank account. With the exception of any related transaction costs, the debit user does not owe money to any external party because the money used in the debit transaction came from the available funds in the user’s bank account.
However, the distinction between debt and non-debt instruments becomes blurred if a debit card user decides to implement overdraft protection. Whenever a person withdraws more money than what is available in his or her bank account, overdraft protection can come into effect and the bank will lend the person enough money to cover the transaction. The bank account holder is then obligated to repay the account balance owed and any interest charges that apply to using the overdraft protection.
Overdraft protection is designed to prevent embarrassing situations, such as bounced checks or declined debit transactions. However, this protection does not come cheaply; the interest rates charged by banks for using overdraft protection are as high, if not higher, than the ones associated with credit cards. Therefore, using a debit card with overdraft protection can result in debt-like consequences.
If you are looking to take out a loan or apply for a credit card, then it will be very important for you to have a good credit score, which is often referred to as your FICO score. After all, the better your credit score, the more likely you will be granted credit and the better the terms you are likely to be offered for a loan or credit account. Even if you think your credit score is high enough, there are likely to be ways you can make it even better.
First things first, no matter how bad your credit score really is, there is always something you can do on your own to make it better, and you can make these changes on your own. There are a lot of companies out there that offer help in this area, but anything legal they offer to do for you, you can do yourself. Not only can you save yourself the fees these companies will charge you, you can take personal control of your financial destiny! Just keep in mind that it will take some time, rebuilding your credit rating is something that doesn’t happen overnight.
The number of credit accounts you have open are also important to control. Credit lending institutions will look at the total amount of credit room you have available to you. If you have 10 credit card accounts, and you have $5,000 of credit room available in each account, then that will amount to a total of $50,000 in potential credit! Lenders will take a look at this potential debt load before considering how much they will lend you. They count the full amount against you, as if you were to go out and max all your cards tomorrow. If you are applying for a large loan (perhaps for a car or house) these limits could work against you regardless if you have a full limit or not. If you are heading to get a larger loan, pay off as many of these as you can and close some of these accounts. A good idea would be to keep three to four credit card accounts open, but only use one or two of them. Furthermore, when you do use them, pay them off before you get a notice in the mail, and pay them off in full.
Remember, it will take some time before you can rebuild your credit rating, but it can be done. Paying off your debts on time and keeping a small number of accounts open are some methods to build a good credit history. The longer you do this, the better your credit rating will become! It is up to you to take control of your financial destiny!