The other day, we witnessed the swearing in ceremonies for new U.S. Senators and Congressmen (and women). It reminds me of the stark reality that the U.S. Government hasn’t balanced a single budget since the Clinton administration. Spending more than you take in is a recipe for a future financial crisis. Our appetite for credit, not unlike the federal government, seems insatiable. A recent news story reported that 25.5% of consumers with active credit now have a credit score of 599 or less, marking them as poor credit risks. This is an increase of 17.9 million people over the historical averages in that category, according to Myfico.com.
Maintaining a positive credit score today requires a basic understanding of the algorithm that determines our credit, or FICO, score. In the past year, Fair Isaac, the company that created the formula as the determinant of our scores, made an important change. It’s now putting more emphasis on the total balances and their proportion to your credit limit. Lenders today worry more about heavy borrowing behavior, so it’s best to get your balances under 50% of your limit, or better still, pay them off at the end of each month.
Inactive accounts will hurt your credit score, but using credit wisely and then paying off the balances quickly will help. Another change is an increased leniency for a late payment. This should help some of the consumers struggling to manage bills during the recent economic downturn, but chronic late payers will still have to face the consequences. One or two late payments now will not have the same effect as earlier FICO formulas.
To qualify for preferred lender status it’s often said that you need a score of 700 or more. In reality you should aim for a score of 740 or higher for the lowest rates and best terms. The highest score is 850, for comparison.
Many people do not like to hear the word “budget” maybe because it seems to suggest a need to “sacrifice” some want, but living financially-responsible lives can still be enjoyable. An easy way to track spending patterns is by using the Intuit’s website mint.com. Other options include tracking your purchases manually, with financial software, or even smartphone apps such as BillGuard, My Weekly Budget, or Intuit’s Mint.
Of course monitoring your own credit report is one of the best ways to stay on top of which accounts you have open and information that may be damaging to your score. Be sure to use http://www.annualcreditreport.com to access information from the three credit reporting bureaus: TransUnion, Experian and Equifax. Since you get one free report annually from each, spread out the requests at different points of the year to stay on top of your information.
Using your bank or credit union’s website to pay bills, set up recurring payments and even using your lender’s automatic bill payment offer are all good ways to ensure that you don’t miss a payment deadline. By tracking your spending more diligently you will be able to pay more than the minimum payment, a critical strategy in paying down your balances.
Finally, you may need to seek the advice of a credit counselor to help you map out a plan, not only to rid yourself of debt, but also to offer suggestions on the other pieces of your financial puzzle. A plan that includes quick elimination of debt balances will free up cash for goals like retirement, college funds and any other goals important to you.