- Understanding Credit Score
- Building Credit History
- Considering Joint Credit
- Debt Management
Getting the facts on different types of debt and how they affect your overall financial picture can help you make better choices about managing your debt. Knowing how different types of debt work is essential to taking control of your financial future.
Revolving vs Installment Credit
Credit cards use revolving credit, carrying a balance from month to month that equals the amount you charge to the card minus the payments you make. Revolving credit accounts are actually your number one credit-building tool. Accounts that demonstrate your ability to make payments on time are what help build your payment history, which is the biggest factor in the credit score equation.
Of equal importance is whether the creditors are reporting regularly to credit bureaus. With monthly reporting to all three major consumer credit agencies, your OpenSky card is designed to help you build credit quickly.
Once you've proven your creditworthiness by using revolving credit responsibly, you’ll find your good behavior really paying off when you want to apply for installment loans. Installment loans are loans with fixed monthly payments over a set period of time for a tangible asset, like a home mortgage or an auto loan. A solid credit rating can earn you better interest rates and lower monthly payments on installment loans that potentially can save you thousands of dollars over the life of the loan.
When it comes to making payments, paying off or paying down revolving credit will raise your credit score higher than paying down an installment loan. It’s great to pay off debt, of course, and save interest on the loan. It’s just that lenders take a big risk on getting their money back with revolving credit, whereas installment loans for home mortgages or auto financing are based on a tangible asset that can be taken from you (and sold again). So having a large installment debt won’t impact your credit scores as much as revolving credit debt. Remember that your available revolving credit compared to the amount you owe (your credit to debt ratio), accounts for 30% of your credit score.
A feature of the OpenSky Visa Card is that even though the Bank holds your security deposit that is equal to your credit limit, the existence of that pledged security deposit is not reported to the credit bureaus. A report of your good payment history for the secured OpenSky Visa Card looks exactly the same as the payment history for an unsecured credit card.
Life happens. Sometimes people get in over their heads with so much debt that they’re overwhelmed trying to figure out how to pay it off. There are essentially three paths to take:
• Make a plan to pay off each creditor
• Consolidate your loans into one
• Declare bankruptcy
It's no news that lots of people get into trouble running up credit card debt, but what many of them might find surprising is that their first instinct—to cut up their cards and close all their accounts once they've paid them off—is actually a big mistake. Don't be tempted to cut yourself off from credit cards—they are actually your number one credit-building tool. In fact, having long-time accounts that demonstrate your ability to make payments on time are big factors in the credit score equation.
Some credit card debt can be managed by taking advantage of 0% APR card offers on balance transfers. If you can move balances to one card, consolidate payments and pay the debt off quickly while the offer lasts, you can save interest payments. But have a repayment plan in place before you take this step and understand what behaviors got you into debt to begin with—or you can end up right back where you started! Also be careful to read other “fine print” rules to be sure you know what you are signing up for. There could be other fees or costs you may not be aware of in the initial offer.
Taking out a debt consolidation loan to pay off all your creditors may or may not be a good idea. Debt consolidation can give you a lower monthly payment than the total of your current payments, and the ease of one bill to pay as well as freeing up some money for living expenses. But a consolidation loan with a long repayment period may cost more in the long run, increasing the total amount you have to repay. Always do the math to make sure you’re making a wise choice.
Credit counseling can be your best source of advice. Credit counseling helps the consumer set up a debt management plan (DMP) to pay off debts and negotiates with lenders on the debtor’s behalf, for example to lower interest rates or to reduce the total amount of money that the lender will accept as repayment. A reputable credit counseling organization will usually review your budget with you for free and let you know if a DMP is the best way to help you get out of debt or if you should consider another option.
The National Foundation for Credit Counseling is a nonprofit agency that provides information and advice about credit counseling, and provides a national network of their member agencies from which you can choose. Be aware that there can be good and not so good credit counseling organizations. So before committing to one, check with the Federal Trade Commission (FTC) or your local Better Business Bureau to find a reputable organization.
Whether you’re budgeting to get out of debt or to make sure you don’t get into debt, it’s important to know where your money is going. Have a plan to make your expenses match or fall below your income. It’s simple math—more money in, less out.
If you find budgeting a challenge, find someone who can help. It can be difficult talking about money with a friend or family member, so the National Foundation for Credit Counseling recommends seeing a credit counselor in your community—they can help on any budgeting and financial issues, not just debt counseling.
Impact of Different Debt
For the most part, three different types of debt show up on your credit report:
Revolving debt. Credit cards and store charge cards are examples of revolving debt. Your monthly payment is determined by your monthly balance owed, and anything not paid off carries over (or “revolves”) to the next month.
Installment debt. Mortgage payments and auto loans are examples of installment debt. Your monthly payment is determined when you take out the loan—a set payment each month for a set number of years to pay off the loan.
Open debt. Your cell phone is an example of open debt. Each month your payment is different depending on the services you used. You have to pay the bill in full each month.
When you apply for a loan or credit, the lender checks your credit report. Lenders might look at the number of accounts you have with a balance owed in order to determine whether you get the loan or credit you asked for. Or they might look at your total debt (“aggregate” debt). Another way to assess debt is for lenders to look at your “revolving utilization.” That means they measure your total revolving debt against the total amount of credit available to you (your credit to debt ratio). The percentage calculated tells lenders how much credit you’re using.
For a good credit score you want that percentage to be as low as possible, and here’s why. Remember that 30% of the points that make up your credit score is based on your amount of debt? The higher your revolving debt (put another way, the less credit available to you), the fewer points you get and the lower your score. As a result, revolving debt has the biggest impact on your credit score.
Managing Revolving Credit
The good news is, if you make a plan and exercise smart credit practices, your credit score will surely rise. Here are some ways to manage your revolving credit and earn extra points on your credit score:
• Keep your balances that roll over from month to month on each credit or charge card as low as possible (reduce revolving debt)
• Increase credit limits when you can—but careful! Don’t charge up to your limits! (increase credit-to-debt ratio)
• Don’t close all your old or unused credit card accounts (they have a positive effect on two credit scoring categories, length of credit and availability of credit)
• Regularly review any unused credit card accounts for any unauthorized transactions for their quick resolution
If you miss payments or you're extremely delinquent on settling your household bills, you can damage your credit score. Consider setting up your credit card to automatically pay your utility bills, cell phone and cable TV bills. With the extra usage of your card, you’re building your credit while making sure you always pay for these other services on time!
Timing Large Purchases
It takes discipline to manage your credit—and deliberate steps to drive your credit score up. If you are planning for a major purchase where you’ll need to take out a loan, such as a home mortgage, there are steps you can take to increase your credit score and maximize your ability to get great loan terms.
Check your credit reports. See what your score is currently. Look for mistakes and work to get wrong or old information removed.
Start early. As soon as you know or even suspect you'll be making a major purchase, begin acting on the steps to effectively manage your revolving credit(see "Impact of Different Debt," above).
Don't allow credit checks. You want to keep credit inquiries off your report, as they can lower your score. Contact the credit bureaus to set this up. This can also serve as an alert or prevent an unauthorized person from trying to set up a new credit account in your name.
Don't apply for new credit. This will not only add a new credit inquiry, but you also may end up tempted to spend more!
- Managing Your Finances