According to Gail Cunningham, a spokesperson for the National Foundation of Credit Counseling, there are certain indicators that financial institutes take into account before lending money.
"Excessive credit card debt should be seen as a warning sign that a person is in the financial danger zone," Cunningham said. She added that such a high amount of debt can greatly "impact a person's credit report and potentially result in a lower credit score."
The average American credit card consumer uses 3.7 cards, according to a recent Gallup survey. Utilizing that many cards can make it more difficult for some people to keep up with their bills and balances, prompting financial problems and unwanted credit scores later in life.
But there are a few ways to stay on top of a credit score. Consumers can follow a few of the tips listed below in order to avoid any stumbling blocks:
Convenience is king in the business world, and that's a major reason why credit cards were designed. When they were first introduced to the market, consumers no longer had to carry a set amount of cash to make a purchase. Credit cards are easy to use, but they're also easy to mismanage, which is why it's important to understand what goes into a consumer's credit score.
Most lenders use the FICO score when examining the risk of a potential borrower. A FICO score gives a good depiction of how safe a borrower is, and their past credit history. If a consumer wants to check their FICO score, they can do so - for a monthly fee - at myfico.com.
One surefire way for a credit card user to lower his or her credit score is by filing late payments. Paying your bill past its due date typically results in a lower score, and this can stick on a FICO report for approximately seven years. Recent credit history typically carries more weight than usage in the past, too. So if one person has a late payment five years ago, and another person has a late payment in the past year, usually the consumer with the more recent late payment will have a lower score.
Avoid canceling old credit cards
Done with that old credit card? It might seem like a good idea to cancel it in order to avoid worrying about it, but that's not necessarily smart.
The Jacksonville Business Journal reported that canceling an old credit card can hurt a person's credit score by raising their credit utilization ratio. The ratio compares the total used credit to total available credit, which impacts scores and helps lenders determine if a borrower is safe or risky for a loan.
In order to calculate a credit utilization rate, look at the amount of credit debt and amount of available credit. If a person's credit card debt is $1,000 and their total available credit is $2500, they have a credit utilization rate of 40 percent. The higher the percentage, the worse off the credit score will be.
Most financial experts recommend that a consumer's credit utilization ratio falls between 10 and 30 percent. The rate directly relates to the credit scores and only applies to revolving debt, such as credit cards, and not installment debt that has a fixed number of payments, such as a mortgage or auto loan.
Try to pay more than the minimum
The Business Journal stated that credit card users should do everything in their power to avoid only paying their minimum credit card balance. The Business Journal said an extra $20 to $40 per month can make a big difference in lowering the principal balance on the card, thus restricting the amount of interest that needs to be paid.
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