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A Crash Course on Credit Cards

Posted on by Cheryl Rauh

What is a credit card?

Photo of a stack of credit cards.

A credit card represents a line of credit (money available for borrowing) that allows the card holder to borrow funds quickly. Think of swiping your credit card like taking out a mini loan for whatever you are buying. Similar to loans, you are expected to pay back the amount you borrow. This amount normally comes due at the end of the month. If you miss your monthly payment or carry a balance forward into the next month (owe money on the card), the company you are borrowing from will charge you the predetermined interest rate. The average interest rate on credit cards currently is 21.68%. When you are issued your credit card you will notice that there is a credit limit, this is the maximum amount you can borrow on your card. Overtime, this limit can be increased if you are managing your card well.

Differences between Credit Cards and Debit Cards

Credit Cards
 Debit Cards
  • Connected to line of credit
  • Monthly bill for purchases
  • Interest builds on unpaid balances
  • Additional fees
  • Builds credit history
  • Fraud protection (liable up to $50)
  • Connected directly to your bank account
  • No monthly bills for purchases
  • Overdraft fees if money runs out
  • Requires pin number
  • Fraud: liable up to 50$ if reported within 2 days; if 2-60 days liable up to $500

Managing your credit card:

Credit cards can be a big responsibility due to the potential for them to be mismanaged. If you are not careful you can rack up a lot of debt and fees that you might not be able to pay off. Additionally, if you miss payments or misuse your card it can hurt your credit score. Your credit score is like your financial GPA and is calculated based on five different things.

Credit Score Factors Graph: 35% Payment History, 30% Amounts Owed, 15% Length of History, 10% Types of Credit, 10% New Credit

  1. Payment History: 35% of your credit score is based on if you make your payments or not. Be careful not to miss payments!
  2. Amounts Owed: 30% of your credit score is determined on your usage of the credit made available to you.
  3. Length of History: 15% is determined by how long you have had credit; the longer the better.
  4. Types of Credit: 10% is effected by how many different types of credit you have. It is actually good to have several types of credit (i.e. a mortgage, student loans, and a credit card).
  5. New Credit: 10% is based on how often you apply for credit.

Finally, to check your credit report, you can go to this website for a free credit report three times a year (due to the pandemic, you are currently able to check your report weekly): Annualcreditreport.com. Your credit report is like your financial GPA, it includes information about your credit accounts, account payment history, and credit limits. It is important to check your report frequently to catch identity theft. Any credit usage under your name and social security number will appear on the report. If there is activity that you know isn’t you then sound the alarm! (Identity Theft Information). Your report will also show your credit score which is like your credit worthiness. Credit scores can range from 850 to 300. The higher your score the better with 700 or higher considered excellent. Having a good credit score is important because if you have a low credit score you could pay higher interest, have a lower credit limit, and it can even impact your employment or renting opportunities.

Three Helpful Tips:

To maximize your credit card for your benefit, I recommend keeping these tips in mind:

  1. Pay off your credit card every month so that there is a zero balance at the end of every month.
  2. Only use 30% of your credit limit. For example, if your credit limit is $2,000 you should keep spending to a maximum of $2,000 x .30 = $600. This means that you should try to keep your credit card spending under $600 for a month.
  3. Shopping and applying for credit cards can decrease your credit. Make sure you only apply for one credit card at a time!

Helpful Links:

If you have any questions about credit cards or want to learn more, please feel free to schedule an appointment with us at Powercat Financial. All appointments can be made on our website: Powercat Financial.

Abram Mugler
Peer Counselor II
Powercat Financial
www.k-state.edu/powercatfinancial 

Know What Goes Into Your Credit Score

Posted on by ekoochel

If you are one that pays your bills on time, you deserve some sort of reward. That is exactly what your credit score is for. Basically, your score can tell lenders, credit card companies, landlords, and even employers how much of a credit risk you are to them.

So check out what your score means, what goes into making your score, and some tips on how to improve it!

What does my number mean?

The most used credit score is called your FICO score, which will normally range from 300-850.

750 or Higher: Having a score higher than 750 will put you in the top 20% of all U.S. consumers. This will lead to the lowest interest rate available when applying for loans.

700-749: If you have a score that falls in this category, you are still sitting at above average. Here, you should feel pretty confident when applying for a loan but should know that your score can still be improved.

640-699: With a score in this category, you will find yourself at the national average. This should tell you that you have plenty of room to grow and that you should look for new ways to establish credit.

580-639: Having a score in this category, you find yourself below the national average. With this score, you may or may not be accepted for loans or new credit, and if you are, the interest rate will be often fairly high.

579 or Lower: This is the lowest category. If your score sits below 579, you should definitely look for new ways to establish credit so that you are able to take out necessary loans when that time comes.

Debt can be scary, but it is extremely difficult to establish a solid credit score without taking on some amount of debt. Do not be credit invisible and begin to establish a credit history.

The five factors that go into making a credit score:

35% – Payment History: Your payment history carries the biggest wait of all five factors. It is vital that you make your monthly payments on time so that your score is positively affected. The way you handled money in the past is often the way you’ll handle it in the future.

30% – Amounts Owed: Lenders want to see that you don’t overuse your credit. Often times, you should want to keep 75% of your credit line available at all times to increase your score.

15% – Length of Credit History: Your credit score will take into account the oldest and newest accounts into consideration. The longer you have an account open, the better. Never cancel old accounts, even if you are no longer using them.

10% – Types of Credit: Your score considers a mix of types of credit. This will include credit cards, student loans, mortgages, etc. Make sure you don’t open too many or too few of one type of account.

10% – New Credit: Don’t open multiple new lines of credit in a small amount of time. This could lead to hard inquires that will negatively affect your credit score. Hard inquires occur when lenders or creditors request your credit report to approve you for a loan or credit card.

Credit cards are not the culprits; abuse of credit cards is!

Tips to help improve your credit score:

  • Check your free credit report quarterly to make sure there are no inaccuracies on your report. You can pull one free report from each of the credit bureaus per year (Equifax, Experian, Transunion)
  • Pay the bills on time to show that you are a responsible consumer
  • Reduce your debt. Each time you make payments on your debt, your credit score will improve
  • Put the shared utility bills in your name and make on time monthly payments
  • Shop for loans quickly. If lenders make multiple hard inquires within a two week period, they will only count as one inquiry.

Nolan Keim
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

 

Credit Score: What is it? Why is it Important? How are credit scores determined?

Posted on by ekoochel

Have you ever thought about buying a new car? Or have you ever dreamed of owning a home some day? Well, your credit score plays an important role in fulfilling both of these tasks and many more. A credit score is a number representing an individual’s creditworthiness. This number is based on past and current credit decisions and files. A credit score is based on information pulled from reporting credit bureaus. A credit score is based on a scale of numbers ranging from 300 to 850. The higher your credit score the better. A higher credit score can potentially lower interest rates for big purchases in life. If you wanted to buy a car, or a house, or even wanted to apply for a credit card, a higher credit score (normally 720 or above) will help you receive lower interest rates and potentially higher credit limits on credit cards.

Now that we know what a credit score is and why it is important, let’s talk about what determines your credit score. There are five key components used in determining credit scores. Myfico.com is a really helpful tool in determining how each of the 5 categories affect your credit score differently. The five components are:

  1. 35% of your credit score is based on your payment history
    1. The first component is really important. Initially a lender wants to know whether or not you have paid past credit and bills on time. A few late payments won’t wreck your score, and no late payments doesn’t mean you will have a perfect score. Just aim to pay all bills and payments on time. One easy way to assure payments are made in a timely manner is to set up automatic payments. Always strive to pay more than the minimum balance if possible, preferably the full amount due.
    2. If you have made late payments in the past and are looking to improve your credit score, start by making on time or early payments on all credit and bills. This will help improve your score and it will look good to lenders to see that you are making payments on time.
  2. 30% is based on the amount you owe compared to the credit you have available
    1. This next component can be kind of confusing. When a person is using a high percentage of their available credit, it may indicate to lenders the borrower is using almost all available credit, not paying off the high balance, and may be more likely to make late payments.
    2. If you use too much of your total credit available, you will hurt your credit score. Use the credit utilization ratio to determine how much credit you are using. Try to keep your utilization around 30%
  3. 15% is made up of the length of your credit history.
    1. For this component of your credit score it is all based on your credit account histories. The longer that you maintain an account with a lender or creditor the better it is for your credit score and the more favorable it looks.
    2. Myfico.com talks about how FICO Scores take into account how long it has been since you used certain accounts, how long accounts have been open and the average age of accounts.
  4. 10% is based on the variety and number of accounts you have. I look at it as, “how often do I shop for credit and open new accounts?”
    1. Next, don’t apply for too many accounts in a short period of time, because this hurts your credit score.
    2. Each time you apply for a loan, credit card, and other financial related accounts, where they check credit, it affects your credit score, so try to keep this number as low as possible
  5. 10% is based on the kinds of credit.
    1. Lastly, this component is based on the different type of credit accounts you have. They prefer to see a mix of credit cards, loans and other forms of credit.
    2. For example if you have 4 credit accounts and they are all credit cards, this area of your credit score could be improved by adding a loan into the mixture if you ever need one. It is all about variability.

Everyone can check there credit score for free at www.creditkarma.com. Know this number and work on making it as high as possible, because the higher it is, the better. As we mentioned earlier, a good credit score brings you several benefits and allows you to achieve financial goals and dreams you may have.

To obtain a free credit report visit the official site at www.annualcreditreport.com. Everyone is entitled to one free credit report every 12 months from the three credit bureaus TransUnion, Experian and Equifax. This site will only provide a credit report, not your credit score. Many lenders will review a credit report to determine the risk associated to the borrower.

If you have any questions about getting your credit score, establishing a credit score, or improving a credit score and would like some help, please make an appointment with Powercat Financial Counseling. You can make an appointment at our website: www.k-state.edu/pfc. We provide free and confidential counseling to all K-State students.

Miranda McMahon                                                                                                                             Peer Counselor II                                                                                                                                   Powercat Financial Counseling                                                                                                              www.k-state.edu/pfc