Sunday, March 23, 2014

Credit Card Usage

     Like I said in my previous post, "Trying To Rebuild My Credit", I now had a couple of credit cards. Now how do I use these cards to put good credit on my credit reports and raise my credit score?

     Sheree and I didn't start using the cards right away. Just having them for emergencies was enough at first. To be honest, I had read about so many people racking up so much credit card debt and not being able to get out of that debt that we were afraid to use them at first. But not using them would not really help us that much. The two largest factors that make up your score are payment history and Credit Card Utilization. If we didn't use the credit cards, our utilization would be good, but we wouldn't have a payment history.

     We finally took the leap and started using our cards after a couple of months. At first we did very little with the intention of paying off the balances every month. But somewhere around May or June, Sheree's sister and kids moved in. She needed help to get back on her feet. She promised to pay us a set amount. Well, that didn't work out as planned. The extra expense of taking care of two families put us in a hole and we had to use our credit cards to stay afloat.

     While I kept the automatic payments going and I knew we were building that good payment history that is so important to our credit scores, Our utilization increased dramatically. For those of you who do not know much about credit utilization, below is Credit Karma's definition.

About This Factor: Your credit card utilization is the percentage of your credit limits that you're using. It's calculated by dividing your credit card balances by your credit limits. Generally, the higher your utilization (the more credit card debt you have), the lower your credit score. This factor has a HIGH impact on your credit score.

Credit Card Utilization

Next: Payment History
Your grade is based on where your standing falls in the ranges displayed below.
Score% of Credit UtilizedCABCDFN/A0%1-20%21-40%41-60%61-100%100+%No Credit500550600650700750
B Credit Card Utilization
Credit Card Utilization33%
Open Credit Card Debt$5,785
Credit Card Limit$17,550
Open Credit Card Debt$0
(no limit reported)
Your standing is calculated based on how much of your open credit card limits you are using for those cards that have a reported limit.

     As you can see, if you don't use your cards, you get a C grade. The goal is to keep your utilization below 20%, but still use them. That way you can get the best possible grade from the credit bureaus.

      It was frustrating to see our credit scores drop month after month because of this. At one point we had reached the 90% utilization range. I was starting to worry, but I wasn't panicked. We had been through worse. Once we were able to get our lifestyle back to normal, we would be able to pay down that debt and all would be good again in the credit utilization world.

     Sheree's sister moved out and Christmas passed and the new year came. New years stand for a fresh start and I was going to make the most of it. I used about half of our tax return to pay down a lot of our credit card debt  (which boosted our scores between 20 and 40 points per bureau) and I have set up a debt reduction plan in Quicken to pay down the rest.

     I'm very excited to see our scores grow in the future just for paying down our debts.