By now, most of us know the stress that comes with too much credit card debt and that debt can come from a single credit card or ten credit cards. It applies to the other side of the spectrum, too. You can have your spending and credit card habits in a health place – again, whether it’s one credit card or multiple cards. It’s all in how you approach finances as whole.
A new Experian report reveals the average American carries three open credit cards that they actively use. Those who tend to overspend usually carry more than three cards. For those who live within their means, they often only have two or three cards.
In case you’re unsure of whether or not you’re being responsible with credit, here are a few red flags, courtesy of Experian, that should clue you in.
Request Credit Report
A request of your annual credit report shows you’ve opened credit card accounts and then promptly forgot you’d done so is a definitive red flag. This can happen with various promotions at department stores, such as an opportunity to save a percentage of your total bill if you open a charge account. Also, the lure of bonus miles upon opening a new account can result in a new credit card that’s quickly forgotten. Even if you’ve never used them, they’re affecting your credit scores.
Worse – or at least just as bad – credit card accounts you’ve forgotten about only serve as irresistible bait for identity thieves. Organization is important – as is common sense: don’t leave a credit card in your car. How many of us check our mail and then toss it into the passenger seat with the goal of going through it later? Even a trip to the local car wash can result in us accidentally tossing a credit card into the very public trash cans, which is easy enough for a fraudster to go through and hit pay dirt.
Does your credit report reveal a number of late payments? That could be a red flag. Even if you think you’re juggling the ten payments a month on ten credit cards, it’s only a matter of time before you fall behind or forget a payment. In our hectic lives, it’s easy to lose track of so many accounts. Not only that, but it can significantly affect your credit scores – even if you are currently making on time payments. It affects your DTI, or debt to income, ratio. As the Experian report explains,
The total balance on all cards compared to the total credit limit on those cards is called the utilization rate. A high utilization rate, whether you have one card or many, is a strong indicator of credit risk and will significantly impact credit scores.
Have you applied for a loan recently only to be denied? There’s your first sign that your DTI is unbalanced. Too many credit cards can easily be the reason you’re not approved for a mortgage or auto loan. Further, there’s a new trend that includes loan officers opting not to take a chance on consumers with more than five credit cards – and that number could drop further depending on future economic times.
If you’ve noticed a trend that includes consistent drops in your credit score, you might need to rein in spending and perhaps make a plan to pay down your debt. Remember, there are several considerations to keep in mind and each affects your score. The age of your credit accounts, how well you’ve made past payments and the total debt you’re carrying. There are those who say credit pulls won’t affect your score, but the truth is, those inquiries do temporarily affect your scores. Usually, the repercussions last around six months. It’s important to keep that in mind as well.
So what should you do if you’ve recognized a trend that’s not going to work to your advantage? Your first best bet is to begin paying down your credit card balances and other accounts. By doing this, you’re actually accomplishing a few things. First, you’re working towards paying less interest each time your balance drops. You’re also altering your debt to income ratio for the better.
Consider closing a few accounts, especially your newer ones and certainly if you’ve never used them. It immediately changes the game and it’s no longer considered a source of debt as far as lenders go. Look at it this way – if you have five credit cards with a $5,000 limit, lenders see that – even if none of those five have balances – as a way for you to go $25,000 in debt instantly. They’re going to pause before approving a $30,000 automobile loan since you could potentially find yourself with bills you can’t pay.
Finally, don’t underestimate the power of savings. There is a sense of safety when you know you’re putting away money each month, preferably 10% of your gross income. Knowing you have an emergency fund or ways to pay off debt if you lost your job is an incredible feeling. Not only that, but as you’re paying down credit card debt and working to avoid overspending, you’ll see your savings grow even faster.
- FTC Warns of Prepaid Card Scams – May 23, 2013