Merchants, banks, employers, insurance companies: in today's economy, they're all busy reducing their risk. One way they do that is to run a credit check before lending you money, hiring you or even before selling you insurance for your car or your health. But while the institutions and companies are being pro-active in protecting themselves, you too can be pro-active by regularly performing credit checks on yourself. Just as breast self-exams are recommended for early detection of cancer, credit self-exams can discover threats to your credit in time to prevent serious problems.
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A thorough credit self-exam means looking not only at the amount of your outstanding debt, but also measuring how much available credit you haven't used. Many lenders are dropping credit limits. If you aren't aware that the limit has dropped, you could easily max out your credit line or even go over the limit. Penalties would be only part of the punishment. The interest rate on all your credit cards (even ones on which you've stayed within your limit) could go up dramatically and suddenly. Even if you haven't exceeded your limit on any one credit card, the moment you exceed 50% of your total available credit, that's going to be a big negative on your credit report.
Some physicians hand out laminated charts that hang in the shower to remind women to perform regular breast checks. As a bankruptcy attorney in Indiana, I've worked with thousands and thousands of women who could have prevented at least part of their financial problems from occurring had they been more vigilant about regularly checking their own credit. It's really not overly difficult or complicated. Once every quarter, you go through three steps. It may take you a little longer the first time, but if you write down a few notes, by the second or third time, you'll find performing a credit self-check quite easy to do.
Step one: Check each credit card by calling the phone number on the back of the card. You want to find out three things about each card: your credit limit, how much you owe and the interest rate that's being charged.
Step two: Figure out your utilization rate on each card. You do this by dividing the dollars you owe by the available credit (you can use your computer or even a hand-held calculator). For example, say your credit limit on your VISA is $3,000, and you owe $1,300. Divide $1,300 by $3,000, and your result is .43. That means you have a 43% utilization rate on that VISA card. That's still below 50%, but getting uncomfortably close.
(An important reminder: It's really easy to go above 50% utilization on store cards. Say you've just bought clothes and spent $150. The cashier offers a 10% discount on your purchase if you open up a card account with that store. The credit limit on that card might be $300 or less, and you're already over 50% utilization and you've just gotten the card!)
Step three: Add up the available credit on all your cards put together. Then add up all your outstanding balances from all your cards. Get out that calculator again, and divide the combined balances by the combined credit limits. That's the number that needs to stay low. Even having more than 30% total utilization rate can have a negative effect on your credit score.
Now that you've completed your self-check, what can you do to avoid negative items on your credit report, higher interest rates, and penalties? According to a Federal Reserve Senior Loan Officer Opinion Survey On Bank Lending Practices, in the last three months alone, 50% of all banks in our country have raised their minimum requirements on credit scores. Those lenders are looking out for their own interests. And now that your credit self-check has armed you with valuable information, you can use that information to protect you and reduce your risk.
What you can't pay off, pay down. Every month, pay at least the minimum on every card you have. Then, pay more to the extent you can. Put the extra money towards those cards where your utilization rate is highest, and, of course, towards the cards with the highest interest rates.
Besides the quarterly credit self-check, once a year you can get a free credit report from all three credit bureaus by going to the website www.annualcreditreport.com. If you have "marginal credit," meaning your record needs some improvement, you can help yourself by asking for this free report every year. Suppose you want to buy a car. After pulling your credit report, the dealer refuses to finance the car. You then try several other places. Those frequent requests for credit records actually hurt your credit score. It's better if you've requested your one free report and bring it with you to show each lender.
Think about this for a moment: Suppose I offered you a wage of $50 for one hour of work every quarter year. The job I'm offering can be done in the comfort of your own home, at whatever time is most convenient for you. I venture to say most parents reading this article would be happy to accept those working conditions. So here's the thing: Devote that hour once a quarter to your own credit self-check. Let's just say the monetary rewards are likely to be hundreds and even thousands of dollars saved in interest charges, penalties and fees.
Credit self-checks are one way you can convert knowledge into real bottom-line results.
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