Welcome to the first installment of Credit U, a new monthly blog series from Telcoe Federal Credit Union. Each month, we'll publish a new blog focused on caring for your credit and your overall financial wellness. This month, we're focusing on the rollercoaster ride known as a credit score.
Depending on your purchasing behavior, personal debt, and other factors, it may seem like your score has its fair share of ups and downs - particularly if you're new to the credit game or if you've had issues with personal debt in the past. Many of our members have questions about their score, especially when it comes to increasing their credit limit and whether or not doing so will help or hurt their overall number. Unfortunately, there isn't a one-size-fits-all answer. However, there are some general rules you can follow if you've been considering increasing your credit line, closing lines of credit, and more.
Repeat after us...Credit increases aren't bad.
Simply raising your credit limit isn't going to cause your score to drop like a hot potato. When it comes to your credit limit, what really matters is your credit utilization ratio, which is, very simply, the percentage of your available credit that you've used.
If this ratio increases, your score goes down. If this ratio decreases, your score goes up. According to Investopedia, FICO\'92s credit-scoring formula assumes that consumers who use more of their available credit are riskier borrowers than those who use less of their available credit. If you're concerned about the health of your credit score, working to pay off your balances is just what the doctor ordered.
Just because you have it doesn't mean that you should max it.
Was your credit limit increase approved? That's awesome news! The thing is, an available balance doesn't mean you should run out and make that major purchase you've been dreaming about. Remember, if your credit utilization ratio increases, then your credit score can take a major hit. Keep balances low, and watch that number go up.
You paid off that creditor. Great news! But don't rush to close out that line of credit just yet.
Remember, think back to that credit utilization score. No longer having to make payments to a creditor is financially fantastic, but you should make your available credit work for you - not against you. For example, if you have a $2,000.00 credit limit but only owe $500.00, then your credit utilization ratio is 20%. If you decrease that limit to $1,000.00 and still owe $500.00, then your credit utilization ratio skyrockets to 50%. The lower the ratio, the better.
When it comes to your open lines of credit, age is more than just a number.
Let's say you've had two credit cards in your lifetime. You've made the decision to close one of the accounts, but which one should you choose? The longer you've had a line of credit in good standing, the more it works in your favor. This shows future lenders that you've been responsible with your credit for a long period of time, which will be reflected on your credit report. Other factors aside, it's best to ditch the newest account.
To get a free credit report review, click HERE and take advantage of Telcoe\'92s FREE credit counseling service, Accel.
Do you have questions about your credit?
Click below or call us at 501-725-6458.