hello, and welcome to your money 2.0. i’m thomas fox, community outreach directorfor cambridge credit counseling. with so many things riding on your creditprofile, you owe it to yourself to keep it in good shape. these days, everyone from insurance companiesto potential employers review credit reports
How To Calculate Credit Card Interest, to measure creditworthiness. therefore, doing the best you can to maintaina positive standing is important. you’re probably already aware of some ofthe activities that will damage your credit rating, like making late payments, using toomuch of your available credit, and so on.
but there are some other actions that canhurt your standing that you might not be aware of. for example, many people think that closingan unused line of credit will always have a positive effect on their score. this is not necessarily the case. when you close an account, you often reducethe amount of credit you have available, which in turn lowers your score. thirty percent of your fico score dependson the amounts owed category, which compares the amount of debt you have to the amountof your available credit.
for example, if you had $15,000 in availablecredit and were using $5,000 of it, or 33%, you may not be in bad shape. but, if you were to close one of your cards,for instance one with a $5,000 limit that was charging you high interest, you’d beusing 50% of your available credit. reducing your available credit adversely affectsyour score. for consumers with very low balances, closingnewer credit accounts, slowly, can make sense - especially if the cards charge high interestrates or annual fees. on the flipside, leaving cards open withoutusing them can also cause your score to drop. the fico credit score looks at how recentlyinformation is reported.
so, if you have an account you haven’t usedin some time, the information regarding that account won’t be calculated into your score. if you leave the card unused for a significantperiod of time, your creditor may eventually close the card. although it’s not a negative move in andof itself, it may easily be misinterpreted by someone reading your report. make sure you know your creditor’s minimumusage policy so you can protect your open credit lines. recently, fair isaac and company adjustedthe algorithm used to translate the information
in your credit report into a three-digit creditscore. the new system, fico '08, weighs data differentlythan it has in the past. while the system would prefer to see minimalusage of credit, it would rather see many low balances on several cards rather thanone or two large balances for the same amount. therefore, those who charge a lot every monthon one card and then pay it off actually hurt their credit score. how? the fico scoring system doesn’t take thepayments into consideration. all the scoring model recognizes is that eachmonth you’re charging large amounts on an
account. finally, taking on new credit affects yourscore in two ways. first, the inquiry generated by applying fora new account will slightly reduce your score. however, the larger concern is how the newline of credit lowers the average age of your credit history. for instance, let’s say you’ve had a singlecredit card for 10 years, but opened two new accounts during the past twelve months. the scoring system would average the lengthof time of all the accounts, making it appear that you’ve only managed credit for fouryears.
well first it would factor in 120 months foryour longest held card. then, it would consider 12 months each foryour new cards. it would add all these months together, andthen divide the total by 3 - the number of cards you have. although you had actually used credit fora decade, the new calculation can reduce your score, since it makes you look like a lessexperienced borrower. well, that’s it for this edition. we welcome your feedback and ask for yourthoughts and suggestions by e-mailing us at yourmoney2@cambridgecredit.org.
thank you for watching. until next time, i’m thomas fox for cambridgecredit counseling.
0 Response to "How To Calculate Credit Card Interest"
Post a Comment