Deciding the ideal number of active credit cards that make life manageable
There are many people that actively engage multiple cards pretty comfortably because theirs is a life that involves a great deal of financial jugglery and wheeling-dealing. Credit card company spokesmen and marketing whiz kids would have you believe that the ideal number would be anything between five and twenty cards, but the million dollar riposte would be - a lot less than that. The veteran of many credit card battles would suggest humbly that a two card approach would create an ideal middle ground – the first indispensable card being a reward credit card that comes in handy for optimizing daily usage, and the second being a low interest bearing credit card that could be leveraged strategically for emergency needs.
The alternative would be an all-purpose “Rambo” card that packs a heftier wallop, earning you legitimate rewards on your purchases, but which doesn’t carry the exorbitant interest that gas and airline cards pack. The arrangement works fine when you compel yourself to pay off balances at month’s end, leaving no scope for interest accretion. But if you can’t keep the expenses down, in what promises to be an expensive summer, it behooves you to latch on to a low interest card. Under no circumstances do you want to continue using a card that may be high on rewards but also high on interest. It’s the question of being caught in an alley with no escape route or being better off choosing the freeway.
Determining when to pay or not pay interest on card balances
There are only two scenarios – whether you pay for purchase from your savings or use the card only for emergencies – but in the latter instance, it pays never to let balances stretch their due dates because interest is a hurtling time bomb that explodes if it is not diffused in a disciplined and time bound manner. It is a corporate myth that you need to maintain higher balances over a longer tenure to score higher credit ratings. Nothing could be further from the truth. Even without high balances you can find ways to boost your ratings.
Knowing how credit scores are finalized and what it takes to keep them consistently high
Sheer ignorance and laziness keeps many people from finding out what makes the credit rating tick, and how a score can be weighted in one’s favor. You may discover several corporate players fielding varying credit scores, but the one that commands the battlefield or at least the one that really matters is the all-knowing omniscient FICO score. The FICO score is the first choice for many organizations and financial institutions that sit in judgement over your credit worthiness or rating because the score gives them a pretty good idea whether you are a tolerable financial risk. The FICO score runs on a scale from 300 to 850 and your notch on that scale decides how capable you are in repaying loans. Needless to say, a higher rating gets companies into a brighter mood to consider your loan request, and a lower rating makes companies hesitant to risk their money on your wavering fortunes.
The exact FICO score is a composite of different parameters that are separately weighted and graded:
The FICO score doesn’t transparently define what constitutes a good score or what defines a poor rating. But you can take it for granted that a score below 650 makes you look like a bad hombre to the sharp shooters that are 650 plus. Scores of 800 plus are sure to get you instant credit with the silken touch of lower interest rates.
Adhering to a reasonable frequency in checking your credit scores
Individuals that maintain excellent credit ratings say they check their scores more often, and do not fight shy of doing it even on a monthly basis, even at extra cost. They say they time their credit checks as soon as the bank’s statement of account lands in their inbox. The AnnualCreditReport website offers a free report, one for each of the three main agencies that report data in the US. If you want the reports at a greater frequency you need to pay FICO for the data. At any rate, one glance at the report will give you a complete picture of your credit status, allowing you a moment to judge the efficacy of the FICO rating and the health of your finances. Checking the report at frequent intervals buys you time to point out errors and get them rectified before they adversely impact ratings.
- 1. Your past payment record — Judges how well you have maintained repayments for past liabilities – gets a risk weightage of 35 percent.
- 2. Amounts that are owed to creditors— Judges how much credit has been availed vis-à-vis the limits set for you by creditors – gets a risk weightage of 30 percent.
- 3. The tenure of credit facilities — how long and how successfully you have availed and managed credit facilities - gets a risk weightage of 15 percent.
- 4. The percentage of fresh credit to old loans — gets a risk weightage of 10 percent.
- 5. How varied is your credit profile — Judges your ability to handle varying credit responsibilities – a measure of your risk tolerance - gets a risk weightage of 10 percent.
Faced with a higher interest bearing balance and a balance with higher outstanding, knowing which to liquidate
The simplest answer to this conundrum will be complicated by the differing financial world views of the gurus that you run to for solutions. One world view suggest that you tackle the smallest balance at the first opportunity, gradually working your way up to the larger balances so as to generate a positive loan-liquidating momentum till your debts become manageable. But such an argument fails notably in one area. If you allow higher interest bearing accounts to accumulate, they inflate your liability at a much faster pace, so it makes sense to finish off those balances with larger lump sum pre-payments. This is the only route to faster and more voluminous savings.
Deciding the advisability of taking on external liabilities
Sooner or later in life, demands will come requesting your cosigner-ship on cards and loans. It may win you substantial brownie points if you agree to these demands and even enhance your popularity ranking in the company or society. But you have to pause and consider the consequences if the person – a friend, a colleague or your own family member - fails to pay back his loan. The situation becomes equally volatile when the borrower misses an installment. Either way, your credit rating and of course that of the borrower, takes a hit. You may convince yourself adnauseum that these are great guys you absolutely trust, but the consequences of loan default will not spare your rating. The final word on cosigner-ship is never to take on a guarantee till you are absolutely confident that you can assume full responsibility and liquidate that borrowing, treating it as your very own loan.
Deciding to extend credit card facility to dependent children
Whichever way you look at it, children need to study and appreciate the fine art of saving money which would lay in place the first stepping stones towards worthwhile investments. Academics and the pressure of studies leave very little time for permanent earnings, and all their energies would be focused more on expenses and spending. Giving them a credit card would be like opening the Pandora’s Box of latent spending desires that children cannot resist. Better still to guide children to cultivate a savings habit that creates an emergency fund for their own future needs, than to show them the garden path to prohibitive spending.
The credit card is a wonderful instrument that could substantially improve the quality of one’s life or do the exact opposite by tempting you to overspend and destroy your hard won credit rating. People without proper fiscal discipline need to keep away from the lure of plastic and live more meaningful lives touched by frugality and watchfulness in expenditure. If you are hell bent on leveraging a credit card, know the answers to pertinent questions that will trouble you frequently – and you will emerge as the king emperor of credit.