Home Buddies - Houston Credit Repair Coach for Investors and Homeowners

Credit Cards in the Credit Mix

Credit cards are a key factor in the credit mix equation of your credit report. They are not just a tool to buy things with. They are proof of how worthy you are to other creditors and lenders. And if you use them appropriately they can help improve your credit score. You can picture the credit cards as the base foundation of your credit mix. A good credit mix includes mortgages, auto loans, installment accounts, and revolving accounts. There is no one perfect formula of a good credit mix that applies to everyone. Everyone’s report is different. And we all know that FICO is not going to give out their formulas.

If you need to start showing some good credit history (some people may just be starting out and have no credit history at all) try applying for a credit card at your local department stores. These stores can sometimes be more willing to give credit. And then once you have established a good credit history with them, then you can look more appealing to other creditors and lenders.

When you actually get to the point of applying for a credit card, there are a lot of things that you really need to pay attention to. There are always lots of fees, charges, interest rates and benefits that vary drastically among credit card issuers. Some credit card offers might seem like great deals until you read the fine print and disclosures.

Let’s explain some of those phrases and terms:

A credit card - Buying something with credit is a loan—you have to pay it back. If the credit card company sends you a check, it’s a loan you have to pay back as well. In addition to the cost of what you bought, you will owe a percentage of what you spent (interest) and sometimes an annual fee.

A charge card - If you use a charge card, you must pay your balance in full when you get your regular statement.

A debit card - This card lets you have access to the money in your checking or savings account electronically.

Annual percentage rate (APR) - APR is the cost of credit defined as a yearly interest rate. You want a low APR!! Be sure to check the fine print to see if your offer has a time limit. Your APR could be much higher after the initial limited offer!!

Grace period - The time between the date of the credit card purchase and the date the company starts charging you interest.

Annual fees – There are a lot credit card issuers that do charge an annual fee for giving you credit. This fee can be from $15 to $75.

Transaction fees and other charges - If you don’t make a payment on time, they can charge a fee. Fees can be charged also for cash advances and going over your credit limit. There may be a flat fee every month, whether you use your card or not.

Special Note: Keep in mind that credit card interest rates and minimum monthly payments will determine how long it will take you to pay off your debt and how much you’ll pay over time. When you use a credit card, please keep track of your spending. Each transaction is like a separate loan. And when the bill comes, you have to pay what you owe. When you pay the bill, be sure to pay attention to your debt-to-limit ratio. Remember this ratio also has a key role in your credit score.

So how many credit cards should you have in your credit mix? However many you need, but keeps you in your budget (yes the “b” word). Just remember that your credit score is not determined only by how many credit cards you have. Having multiple credit cards that you use correctly can boost your credit scores by lowering your overall debt-to-limit ratio, or utilization. This ratio makes up 30% of your credit score.

Special Note: Try not to close credit card accounts unless there is an extreme financial need to do so. The impact of closing a credit account reduces the amount of available credit that you are showing on your credit report, which can have a negative impact on the score. Don’t just close out the oldest account or drop the credit card with the highest limit. When you lower the “average age” of your credit card accounts or you “lose” a high credit limit, this can hurt your credit scores significantly, especially if you only have a few cards.

So when you get your credit cards, and use them, the important thing to remember is to stay within your spending budget, pay them on time, and keep the balances at a low debt-to-limit ratio. If you manage your credit cards correctly you should be able to save some money and also build a better credit score.

Good luck.

Barbara Partaka
Home Buddies