Credit Card Debt Management

Your credit score is immensely important, not only in your finances, but in life. Insurance costs, job prospects, and homeownership are all affected by this three-digit number. Determined by the Fair Isaac Corporation, thus the name FICO, your credit score has tremendous power over your life.

This is why it’s quite important to understand what makes up your credit score and how you can control it. As the pie chart shows, your credit score is roughly 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit and 10% types of credit.

1. Payment History

This is fairly self-explanatory — pay your bills on time, every time. Why? Delinquent payments can stay on your credit report up to seven years. If you have problem paying a bill, talk to the lender and update them on how much you can pay and when it will be available. One important note here is that, while everyday bills like utilities won’t go on your credit report, a late payment on one of these can increase your credit card interest rate (i.e., the monthly amount you must pay). Then, you risk falling behind on the credit card payments and your credit report can become marred.

2. Amounts Owed

This category takes into account not only what you owe currently, but what you could possibly owe in the future if you were to max out all your available lines of credit. Essentially, lenders want to know how much you could borrow from all lenders combined, and whether you would be financially able to pay it all back. This speaks directly to your level of risk as a borrower. One solution is to close lines of credit that are paid off and sitting unused, but only if they are newer accounts from within the last three years or so.

3. Length of Credit History

Lenders like to see an established history of not just having credit cards or loans, but having the same accounts with the same lenders over several years. This is why, if you have lines of credit that are paid off and sitting unused, but have been with you quite a while, you should consider keeping them open. Instead of closing it, ask the lender to reduce the available balance to the minimum, then cut up the card and stop using it.

4. New Credit

Try to limit the amount of new credit accounts you open within a short period of time. Also, try to contain credit inquiries (i.e., credit checks run on you for the purpose of obtaining a loan) within a short time period. If you’re shopping for a car or home loan, lenders are going to be checking your credit report a lot. It is gentler on your credit report to get this all out of the way within a couple weeks, as opposed to a couple months.

5. Types of Credit

Revolving credit, like credit cards, should ideally appear on your credit report alongside installment loans, as in a mortgage or car loan. This shows lenders your level of responsibility in handling a variety of debt.

Also, don’t forget to check your credit report often. The best way to get started is to visit AnnualCreditReport.com. A credit check can help correct any reporting errors, as well as identify weak spots in your report and how they might be strengthened.

The fact is, we live in a credit-oriented society. Even if you loathe credit cards and never want to see one again, you really need them if you ever plan to finance a major purchase like a house, car, higher education, etc. You should have at least one credit card, use it for gas or grocery purchases, then pay it off each month. It’s essential to your financial well-being.

Without maintaining at least one loan, your credit rating goes down the toilet because there is nothing by which a lender can judge your fiscal responsibility and accountability. The easiest loan to obtain and maintain is a credit card, even if it’s a small, low-limit student card or retail card. Sometimes a person reaches a point in their life where they do want to buy a house, but have zero credit rating. It’s simply a thing they never thought about, often because they never had to. This is most common among young professionals, as well as widows or widowers whose late spouse may have been the only name on the couple’s credit cards and loans. If you are in this position, don’t despair — it’s not too late!

As aforementioned, it is relatively easy to build up your credit rating with credit cards. You can start with a retail card. These type of cards are more readily approved and have a low limit, so it is slightly less difficult to get in trouble. The bottom line is to pay off your credit cards each month! Then, when you take care of the small things, bigger things like home financing will be no hurdle at all.

Credit monitoring services are currently viewed as the best way to prevent identity theft from touching your life. The standard features include credit account and credit report monitoring for any sudden changes, as well as insurance to help you “get your life back” and cover any fees related to identity theft recovery following an incident. The service is provided by all three major credit bureaus, Equifax, TransUnion and Experian. There are also a host of independent companies that offer a smorgasbord of identity theft protection plans.

However, there are mixed opinions on credit monitoring services. Are they really worth the monthly fee (typically around $10), or are they overrated? While many customers can acknowledge that they are paying for convenience and that’s OK, many others are frustrated that the services provided by credit monitoring companies could be handled by themselves, or by their grandma or their 3-year-old, for that matter. For instance, in his By the Bayou blog, John vents his frustrations with Equifax’s credit monitoring service (or perhaps the lack thereof):

“Basically, they alert you when your account balances change. So, for example, when my Amex has a balance of $150 and then I spent $100 on something, I get an email warning me that the balance went up more than 30%! Or if I buy something expensive with my MasterCard, they tell me about it. Oh, and you get the warning a week after the purchase, so if somebody was using your card information, they would have been using it for the last week.”

If you do decide to use an independent identity theft prevention, protection and recovery program, check to see if they monitor your credit reports from all three bureaus, or if they check only one. Consumer Reports suggests that an up-and-coming service, ID fraud prevention and detection, may provide a more comprehensive picture. This service monitors other avenues (besides credit card information) that thieves might use to compromise your identity — think social security numbers, driver’s license numbers, etc. ID fraud prevention and detection is expected to surpass credit monitoring services in terms of consumer popularity by the end of 2009, according to Consumer Reports.

This newer type of service works by “trawling Internet chat rooms and directories and by sifting through online public records for signs of Social Security number fraud, stolen credit-card account trafficking, and other types of ID theft,” states Consumer Reports, adding that some of the services do offer limited monitoring of credit reports.

On a slightly different note, the Washington, D.C.-based iSekurity is offering a new service that is garnering much attention. Though not geared so much toward identity theft prevention or even recovery, necessarily, iSekurity’s main goal, it seems, is to track down the thieves and hold them accountable for their crime. As an organization staffed by former federal agents, iSekurity has the skills and know-how to get the job done, as well as the awareness that this is one of the most overlooked areas of federal law enforcement. The time and resources simply aren’t there for identity theft crimes to be investigated and prosecuted fully by government agencies, so criminals are generally able to run rampant. So be smart when deciding how to protect yourself!

1. Research the many different ways identity thieves can get to you (mail, Internet, credit cards, etc.)

2. Look into the most common problems faced by identity thieves (inadequate help in reestablishing good credit and good name, frustration at lack of investigative effort).

3. Then make sure you purchase a plan that covers all the bases.

4. Don’t become complacent in your sense of security. Still be proactive in protecting yourself by guarding your cards, putting a stop to credit card mailings, get your bank statements by e-mail, have your mail directed to a post office box and shred important documents. These are just a few of the steps that, when combined with a professional service, can help you avoid becoming a victim of the fastest growing crime in American society today.