Credit Cards Are Convenient – But Using Them Can Hurt Your Credit Scores

     Be on the lookout this holiday season for how you are spending your money. Make sure you budget and put aside the money that you want to spend. Charging on your credit cards if you cannot pay the bill right away could have long term effects on your credit rating and set you up for a unpleasant surprise in the future. Perhaps part of your plan is to apply for a few credit card offers after the holidays to do some balance transfers. Although this can be a great strategy, you want to make sure that you do not over spend now.

     Over spending on your credit cards now can have a negative impact on your credit scores. Every credit card has a maximum credit limit. The credit scoring system is heavily focused on your revolving credit account activity (credit cards) because revolving credit is often the most risky credit you can have.  It is the highest risk because the interest rates can go up ridiculously if you miss one payment which could hurt your ability to pay your cards off. Also, credit cards are not attached to any collateral so if you are going to go bad on debt, you are more likely to go bad on credit card debt first.

     If your credit card balance goes above 50% of your credit limit, your credit scores are likely to go down. Imagine your surprise, next year after the holidays, when you get a letter from the credit card company you just applied with, to get a credit card, denying you a card. The letter says that you do not meet their credit standards and you come to find out that your scores have dropped from the low 700’s where you thought they were to 650. Your credit history is still perfect, but you are now a riskier credit consumer because your balances are too high compared to your limits all because of the credit charges you just made. Guess who just shot themselves in the foot this holiday season?

     What can you do? Immediately get a copy of your credit report. If you get turned down for credit you are entitled to a free copy of your credit report. The creditor who turned you down should provide you with the information you need to get a copy of your report from the credit bureaus. Another place to get your credit report for free is: annual credit report. If you go direct to the credit bureaus or to annual credit report for your free credit report, you will not get your credit scores. You will have to pay for your credit scores. What you will get on your free credit report is your balances, the credit limits and your payment history. This should be enough to develop the plan to get your scores back up.

     Go through your credit report and make a list of all of your credit accounts starting with your mortgage (if you have one), auto loans, and other fixed loans first (like student loans, and bank loans). Then draw a line under these items and make another list of all of your credit cards with their balances and limits.
     Now, look at your list and start paying on the credit card that has the highest balance that is closest to the credit limit on the card. Do not make any extra payments on your other credit cards while you are working this plan. Also, do not make any extra payments on your mortgage or home equity line to pay them down either. You want all of you focus going to paying down your credit cards one at a time to the point of where they have balances that are less than 50% of their respective credit limits. Once you get them all down paid down, go back and start at the highest interest rate card first and start making extra payment s on that card until it is paid in full. Do not close the card out when you get done paying if off. Part of your credit rating is based on open lines of credit as well as how old they are. If you keep it open, but do not use it you can do yourself a lot of good.

     This is one strategy of many that you can use to get yourself out of debt after the holidays. Visit our section on Debt Negotiation. Or More Articles on Debt Consolidation