Many factors impact
your
spending
habits. Just how much of your outlays are on your
credit
cards
impacts your credit rating.
Psychologists have found forces
that
govern our behavior
s
and cause us to make decisions that
are not ne
cessarily rational or in our best interest.
Spending may
cheer you up because it
produces
a temporary feeling of elation or
because ownership
brings with it
social status.
A
n advertisement
that associates
an
item with happiness can
cause
you
t
o buy
online
or
in
a
s
tore.
Out of habit, y
ou may s
top
every day at a coffee store on the way
into
work or
go out for
lunch several times a week.
Of course, there’s impulse spending for that “must
-
have” item that gives you instant
gratification. You may also get a fe
eling of satisfaction from getting a bargain price
, even if you
don’t need the item
.
And you may feel that by
handing
someone a
nice
gift they will return the
favor with affection.
Any and all of these may
behaviors
lead you to
splurge s
o much
that
you
dive
into
deep
debt.
And when all that spending is financed through credit cards, your credit
score
can suffer.
R
esearch shows that people spend more when they use
a
credit
card
instead of cash or
a
debit
card.
Why?
Credit allows you to fulfill
an immediate need
without having to pay right away.
When you
tap or swip
e plastic or enter a credit card number online, your bank balance remains
the same.
Until the bill arri
ves.
And that’s when your credit
score
can take a hit.
While you should use a credit
card from time to time, spending more will not
improve
your
score.
Stay under
30% of your
credit
limit
, and the lower you stay below that, the better. Reason:
The ratio o
f the
card
balance to the credit limit, known as credit utilization, is
the second
-
most
watched number at credit bureaus
such as Experian.
The most important, of course, is payment history. Credit bureaus
mark off for late payments.
When you overextend yo
urself, you are less likely to make even minimum payments on time.
How can you keep your credit card balances in check?
- Pay down the higher balances first so that you get back under the 30% figure across the board.
- When you know that you will be crossing the ratio threshold in a given month, make an early payment to lower your card balance.
- Under certain circumstances, ask for a higher credit limit. That will lower your ratio. There’s a risk, of course, that you will feel freer to spend more. Proceed with care.
- Keep open a credit card that you rarely use. It may seem odd, but credit companies apply the 30% ratio to the sum of your credit limits. If you are at 40% utilization on one card and 0% on your only other card, the ratio across the two cards is a reasonable 20%.
For more information on how to keep your credit score healthy, visit Tropical Financial’s “Get Beyond Money” section. There, you will find helpful articles, a podcast and other resources.
By:
Tropical Financial Credit Union