Despite the SpaceX IPO, markets were essentially flat last week. Worries about continued high inflation coupled with a resilient labor market have raised the possibility of a rate increase later this year. The new head of the Federal Reserve, Kevin Warsh, would like to consider other inflation measurements and is also concerned about the size of the bank’s balance sheet. How his concerns factor into rate decisions remains to be seen.
What interest you personally pay is partly determined by the Federal Reserve, but also by your credit score. That score can range from 300 to 850 and can also impact qualifying for a car loan or apartment lease. The main factors that impact your score are on-time payments, amount of credit utilized, length of credit history, requests for new credit, and the types of credit you have.
Paying every debt on time makes up a large part of your score, and the length of a late payment also matters, with a 60-day late payment worse than a 30-day late payment. Having your credit pulled when you want to take out a new loan or credit card has a smaller impact, and it doesn’t last as long. Late payments affect your score for seven years.
Having both an installment loan, like a car payment, as well as revolving credit, like a credit card, increases your score. That’s why paying off a car loan, which should be a good thing, can temporarily drop your credit score.
Another large factor is the amount of credit utilized. Using less than 30% of your available credit is a good thing. At the same time, you do not need to carry a balance to increase or maintain your credit score. Paying off your cards in full every month is a good thing and does not reduce your score.
At the same time, you do need to use your card regularly. Lenders may reduce your credit limit or even close cards that are infrequently used. They do not want to take the risk of someone having large amounts of untapped credit that is only used if the consumer runs into financial trouble and may then be unable to pay off the large debt.
If you’re looking for a new card, a site like bankrate.com or thepointsguy.com can provide comparisons among card benefits. For most people, a no-fee card with cash back will be your best option. If you’re unable to pay your balance in full every month, look for the lowest interest rate. And if you are carrying credit card debt, a zero-interest introductory rate means opening a new card to transfer higher-rate balances can speed up the process of paying off your debt.
Using credit wisely has wide-ranging impacts on your life. A credit card that offers cash back or travel points can be a bonus when you pay it off in full each month. Credit cards with large balances or late payments can weigh you down and prevent you from reaching your financial goals. Paying them off and then building an emergency fund are the first steps towards financial freedom.
Your action item this week is to remove your credit card numbers from online shopping sites. Make yourself go through the trouble of getting your wallet and entering your card to slow down the purchase and give yourself time to consider if it is a need or a want.
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