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In high school, we were required to take a personal finance class. Credit cards are a HUGE topic in finance and the only thing my teacher told me was “do not get a credit card”. No questions asked. I was taught to be afraid of credit cards because they are culprit behind debt.

Then last summer, I was getting married! My fiance and I had no apartment, we were both between jobs, and dirt poor. I had no idea how we would afford anything after the wedding. We prayed for a miracle every night. One day, a shiny envelope came for me in the mail. I had always thrown them away, because I knew what it was: an application for a credit card. This sparkly thing was the beginning of the path to debt! Yet, this envelope did not end up in the trash. Alex and I talked about it, and we decided that this was something I needed to get. We were both starting new jobs right after the honeymoon and we wouldn’t miss our first payment. We set ground rules for exactly what the card would be used for, when it would be used, and how much we could use (the credit limit was too high for us).

Now, I am the owner of a credit card. I really like it, it has great cashback benefits, no yearly payments or hidden interest rates. My husband and I only use it for our gas and then pay the amount back immediately on the app. Thanks to cashback, I always save a little bit of money (usually 20-50 cents) on each transaction. When people hear I have a credit card they laugh. A financial guru has a credit card? Yes, I do. I have never missed a payment, and my credit score has raised tremendously in just one year. People are afraid of credit cards because they offer a great temptation, but if you have the correct mindset going in, you’ll be fine. My family can attest that I do not have the most self control when it comes to cute clothes and good food. Despite this, my self control is topnotch when it comes to my credit card. I understand the responsibility and I understand how the system works.

There are tons of credit card companies and just about every clothing store has their own credit.  I am not qualified to tell you which are the best or which ones will give you the largest limit. Credit cards are not for paying your tuition, credit cards are not for impressing your girlfriend with money you do not have. It is an extension of your bank account! Eventually that money has to be paid back, and usually with interest.

If you have a credit card, or you are wanting to learn how to improve your FICO credit score, I have listed the main categories on the scale below. They are listed in order of importance. Read each of them carefully, and I would love to answer questions or comments below!

Disclaimer: This the scale is not used for every FICO score, but 90% of scores use this scale.

Missed Payments: 35%

These weigh heaviest in your FICO credit score. Why? Because people who continually miss payments are more risky to lenders than people who continually pay their bills. If your score is bad because of missed payments, the best thing to do is start making at least the minimum payments by their due dates. More recent activity will weigh more than (not erase) your old activity. This is the most important: do not miss payments!

Total Accounts: 10%

Lenders want to make sure you can handle your accounts responsibly. You have two types of accounts in FICO: Installment Loans and Revolving Credit. Revolving Credit will consists of any credit card statements, or other bills that come every month based on what YOU spent. Installment loans will consist of student loans, mortgages, or other loans where you pay a set amount each month until you have paid it off. You want to have a moderate number in both of these sections, especially revolving credit, because it proves you can manage accounts. Too many may steer them away because one too many might throw you off. If you have too few accounts, consider getting another credit card. But be aware, closing accounts will not rid them immediately on your credit score or even lower your score.

Length of Credit: 15%

You want a long credit history. Like a relationship, the longer you have been faithful, the easier it is to trust you. They take into account your oldest and newest accounts, along with the average. There is little you can do to change this except wait.

Inquiries: 10%

When you apply for a loan or a new credit card, lenders will do a hard inquiry on you. FICO flags any activity as “credit seeking”. If you credit seek too much within a year, then it will look bad. Fewer inquiries is good! If you do have a lender do a hard inquiry, know that it will only temporarily lower your score. The important thing to remember is to not credit seek too often.

Revolving Utilization: 30%

This one is tricky but very important in your credit score. It is sometimes called: “debt-to-limit ratio” because it takes into account how much credit you are using in relation to your credit limit. When you applied for the credit card, even if through a retail store, you were given a limit. For example if $500 is your credit limit, then you can only spend $500 with that card. Then it takes into account your balance, or what you owed on the last statement. To calculate individual utilization percentage on an account, divide the balance by the credit limit, and multiply that number by 100. If your limit is $1,000 and you spend $100 this month, your revolving utilization will be 10% for that account (100 divided by 1000 = 0.10. 0.10 x 100 = 10%).  In short, your revolving utilization percentage shows how much of the available credit you are using. You want the number to be as low as possible, under 10% is very good! If your revolving utilization is high, spend less money on your credit card each month. Using it for small purchases like meals or gas, will lower the balance and lower the percentage. Eventually, the credit card company may ask if you want to increase your limit, allowing you more room for bigger purchases.

Loads of debt is scary, but credit cards are not. They need to be taken seriously, but you are already on the right path to financial security. You’re here, reading this article because you want to know more! The more you know, the less likely you’ll fall into the financial traps set. Continue reading TBD’s Finance posts to learn more!

-Madison

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