Having a credit card is a great responsibility. Some of us use our credit wisely and some of us use credit unwisely. Credit is one the most important aspects of your financial future. You could have a sizeable savings account but have bad credit and may still get denied for a loan or credit card. At the other end of the spectrum, you could have no savings account and good credit and get approved for several loans or credit cards.
Here are 6 tips to help ensure you know your credit picture when applying for a loan or credit card.
1. Do you how many accounts you have the are currently late, i.e. 30, 60, 90 days or more?
2. Do you have any accounts have that were previously late, i.e. one or two years ago?
3. Do you have any open or closed accounts there were collection accounts, repossessions, judgments, or bankruptcies?
4. How many loans or credit card accounts you have opened in the past two years?
5. How many revolving and installment loans you have?
6. How many open credit card accounts you have?
If you answered question 1 you may have bad credit and need to quickly setup payment plans to get current on your late accounts. You can also open a secured line of credit or secured credit card to establish good credit. Your credit score could range anywhere from 350-500.
If you answered question 2 or 3 you may have bad credit and need to open a secured line of credit or secured credit card to establish good credit. Your credit score could range anywhere from 501-659.
If you answered questions 4, 5 or 6 you may have average or good credit depending on the amount of debt you owed and your credit limits. Your credit score could range anywhere from 620-700.
If you were not able to answer questions 1, 2 or 3 you probably have average to good credit as long as you have not made any late payments in the last 3-6 years. Your credit score could range anywhere from 650-750.
The most important thing to remember before applying for a credit card is to determine your total credit limit. Many of us including myself believed that your total credit limit was the credit limit on each credit card or line of credit. Your total credit limit is the credit limit on each credit card, i.e. if you have 3 credit cards, a Discover card with a credit limit of $5,000, a MasterCard with a credit limit of $7,000 and a Visa with a credit limit of $10,000, your total credit limit is $22,000 ($5,000 + $7,000 + $10,000).
This amount is factored in your debt-to-income ratio during the review process for approval of a loan because it is the amount of credit that you have available and could possibly use at any given time although you may never use it.
Also, determine what your total balance is for each open credit card. The total balance is your credit limit plus the current balance on your credit card, i.e. if you have a Discover card with a balance of $3,000, a MasterCard with a balance of $700, and a Visa with a balance of $5,000, your total balance on your open credit cards is $8,700.
This amount is one of the 5 factors used to determine your credit score and accounts for 30% of your credit score.
It is not a good habit to “max out” your credit cards because this may lower your credit score and can cause you to go over your credit limit and results in additional charges from your creditor between $29-$35.
If you have a MasterCard with a balance of $6,000 and a limit of $7,000 and a Visa with a balance of $9,000 and a credit limit of $10,000 you would be considered “max outed” because you have less than 10% of the credit limit available to spend.
Use credit cards sparingly and always make your payments on time. If you know you will be making a late payment contact your creditor immediately to setup a payment plan or arrangements to make a payment so your credit is not affected.
Copyright © 2007 H.E. Freeman Enterprises
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