How Credit Cards Affect your Credit Report

Credit Card Scores Really do Matter!

Basically your credit card score, or your credit card history, is a grade that sends a message to potential lenders about your spending behaviors. Think of a credit card score as your reputation in high school. If you spent your time at the mall giving into each and every purchase that caught your eye, you wouldn’t have a very good reputation, and word would get around about your behavior. Just like a bad social reputation, a financial reputation can follow you around for a very long time. The only trouble with a financial reputation is you can’t escape it by going to an out of state college.

A poor credit score will not go away for some time, and you can’t hide if from lenders, landlords, and maybe even potential employers come the time that you need a loan.

How do credit card scores affect your financial future?

Good question! Here’s a scenario for you:

Scenario #1
You were that kid in college who signed up for a student credit card the minute your feet touched campus. In your first month at school you used your credit card to party and order take out every night of the week. You came to college on a student loan, so you didn’t have the extra money to spend on partying. Your parents told you to only use your credit card in emergency situations, but you figured if you used it to eat…regardless of if it was pizza for your whole dorm floor, it would be ok. You received your credit card bill in the mail, but figured you’d get to it later. The following month you received a second bill with $35 interest. The third month you received a warning in the mail that you’re credit card would be revoked if you didn’t pay the balance due. The next time you ordered pizza the delivery guy was told that your credit card was denied. It’s time to fess up to mom and dad - you’re in deep credit troubles.

See your credit card history began as soon as you signed on the dotted line for that plastic card and began charging away. Now your credit score will follow you like the plague. It will affect your credit future, meaning if you’re able to get additional credit cards and what your interest rates will be, if you can secure a personal loan for an automobile, and if you will be approved for a mortgage when it comes time to purchase your first home.

Here are some examples of the major roadblocks you will encounter in your financial future if you have a bad credit history:

Scenario #1
You get your first job after college and decide that you want to stay in the same city where you graduated from. You need an apartment of your own. You’re tired of sharing digs with 3 other smelly guys, so you start to peruse the newspapers for an adult apartment. You find a fantastic place right in the neighborhood where you work. The listing reads “Responsible tenant wanted. Credit history required”. You go to view the apartment and you love it, and the landlord asks for your credit history and references. The following day the landlord calls to tell you that your references checked out, but he had to give the apartment to someone else because you had a bad credit report. A bad credit scores tells potential landlords that you are a high credit risk, and that you are not financially responsible. That’s why your apartment application was turned down.

Scenario #2
You and your boyfriend have decided to move in to your first apartment together. You’ve just signed the lease and it’s time to order the utilities. He’s offered to pay for the gas bill if you foot the electricity bill. You still owe $350 on the electrical bill at your previous address because you kept losing the bills and forgetting the due dates, but this is a new address so that shouldn’t matter right? However when you call the electrical company they ask for your name and personal information, the customer service representative tells you that you still own $350 plus interest, and that you won’t be able to get electricity in your name until you pay off your debt. Plus, even when you do pay off what you owe, they will only give you the service if you pay a $200 deposit. You are considered a high credit risk. You better believe that the telephone, cable television, gas and electrical companies all keep record of your payment behaviors. If you’ve defaulted on payment it will make it difficult for you to get these services in the future.

Scenario #3
You’ve decided to get a second credit card because the one you have now carries really high interest rates. You’d like to be able to pay off your existing credit card with this credit card that offers ? the interest rate. However when you call to order this credit card the lender takes one look at the hefty balance you carry over from month to month and quotes you for a very high interest rate. You are a high credit risk, and all of your future interest rates and credit limits will reflect that. A good credit score means better interest rates, higher credit limits and a bright credit future!

Scenario #4
You were married 3 months ago. You’ve just learned that you’re pregnant and you want to move out of your small rental apartment and purchase your first home – nothing extravagant, just a townhouse to start. You approach a bank to get pre-approved for a mortgage, and the mortgage broker does a check on you and your husband’s FICO (which stands for the Fair Isaac Corporation who developed it) credit scores. FICO is the mathematical equation used by credit bureaus to evaluate lending risk. A good FICO score is 700 or more. This means that you will get a good mortgage with an lower interest rate. However if your FICO score is 600 or less, you could expect a less flexible mortgage with a interest rate that is up to 3 points higher. In the eyes of mortgage brokers and lenders a FICO credit score that exceeds 700 means you have a good credit history; while a FICO score below 600 means you are a high lending risk, and cannot be trusted to pay back the loan.

Your FICO credit score is based on the following personal financial information:

Your payment history – counts for approximately 35% of your FICO score. It considers if you pay your credit card balance on time.

Your current debt – counts for approximately 30% of your FICO score. It looks at the amount on your credit bill, and if you routinely go over the limit on your credit limit.

Your credit history – counts for approximately 15% of your FICO score. Lenders will look more favorably on a customer who has a longer credit history, as compared to someone with zero or a short credit history.

Additional or varied credit – counts for approximately 20% of your FICO score. Have you recently applied for more credit or loans? Do you have a mix of credit on your record (car loans, utility payments, and mortgage and personal lines of credit? People with varied, yet responsible, financial histories are looked on favorably by lenders.