Card credit score
Credit scores are very important for a person. This is because the credit scores affect a person greatly when he goes for obtaining any type of loan, or insurance product or even the credit card. If a person has a good credit score, he can easily save thousands of dollars towards getting finance and insurance at easy terms and conditions. Does this mean that a person should not take a credit card as it hurts the credit score of most of persons.
No, it does not mean that but a person has to use his credit card in a very careful manner so that it can improve his credit scores rather than affecting it badly. The credit scores are maintained by special credit rating agencies. For example, in United States, there are three credit rating agencies that maintain and provide credit scores. These are Equifax, Trans Union and Experian.
How credit card can be used to get a good credit score
There are many prudent ways of using the credit card and improving the credit scores. First of all, a person should make the payments in time. When a person makes a purchase by means of credit card, he is given interest free grace period to repay the purchase bill. After that date, a person has to pay interest on the amount. The total amount has to be paid in the given time limit to avoid penalties. The person should try to make payments of all the credit card bills in the grace period. This would allow his credit score to improve. This can be done by shopping for that amount only which is affordable by a person and which can easily be paid back in time. Though credit card limits are high, a person should never think of using the credit card limits and cash limits to the full. Keeping the credit expenditures low is an excellent way of doing stress free shopping by a credit card. The interpretation of credit card and credit score provided above is very simple one and in fact, there are many other factors that affect the credit score. For example, the length of the credit history, the number of credit cards carried by a person, the rate of credit utilization of a person etc are the other factors attached to the credit card that affects the credit score of a person in a great way. Most of people get their credit cards cancelled in order to have a good credit score. But canceling a credit card does not help a person at all in getting good credit score. On the contrary, it can put adverse affect on the credit score of person. There are basically five categories that are used for making the overall credit score of a person and it is upon the person how he manages these five categories. Let us discuss these next.
The categories
Before we discuss the five categories, it is very important for a person to understand that each of these five categories has a say on the credit score and each one of them is weighted separately to get the overall credit score. The first category is the payment history attached to the credit card and other credit facilities. This category has the maximum say in the overall credit score which is 35%. Thus, if a person is repaying that amount utilized by means of credit card in time, he is having a good credit history and his credit score gets better. However, as most of persons do, paying the credit card amount after the due date would adversely affect the credit score, i.e. by 35%. Next category of the credit score is the amounts owed by a person. This category has a 30% say on the credit score and thus, is the second most important factor in determining the credit score of a person. If the person has used credit card for large sums, his credit score would be affected in negative manner. However, if a person has used the credit card for small amounts or has paid back most of amount in time, it does not make any negative impact on his credit score. The third category is the length of the credit history. This has 15% say in the credit score. If the payment pertaining to credit card is due since long, it would put negative impact on the credit score of a person. Similarly, if the length of the credit history is small one, it would not make any adverse affect. Fourth category is the new credit and it has 10% say in the credit score. This depends upon the number of new credit cards taken by a person. More is the number of such cards, lower is the credit score. Thus, it is better if a person keeps minimum possible number of credit cards. Last but not the least, types of credit used by the person, is the fifth category that has 10% say in the credit score. Whether a person has utilized the purchasing limit or has withdrawn cash from credit card is included in this category.
When a person cancels a credit card to get his credit score improved, he is actually hurting his credit score as doing the same affects two or three categories mentioned above.
So, what has to be done
For having a good credit score by the use of credit cards, it is very essential that a person maintains a proper utilization ratio. If this ratio is good, the credit score is good. It is very important for the readers to note here that the credit utilization has a 30% say in finding the credit score and if a person cancels his credit card, it would definitely affect his credit score. This is because when a person cancels his credit card, the total amount of credit available gets reduced and the credit utilization ratio gets decreased. This affects the credit score badly. If we closely observe all the factors relating to a credit card, we would come to know that a person can have a good credit score if he is having a few credit cards and he is making payments towards them all in time, not crossing the limits provided in any way.
Would come to know that a person can have a good credit score if he is having a few credit cards and he is making payments towards them all in time, not crossing the limits provided in any way.
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