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My first credit card transaction was in the late 80s. My mom added me as an authorized user to her credit card account and it’s what I’ve used for my expenses all throughout college. With it, it was easier to track my spending habits and the cashless transaction convenience that it brought me and other early users was unheard of at that time, it was an innovative financial product to say the lease, little did we know that it was going to revolutionize the consumer spending habits in America, and the rest of the world in ways that we could never have imagined during that time. It was very uncommon to have one at your disposal back then, but nowadays it is hard to go about our daily lives without having it in our pockets, from brick and mortar shopping all the way to buying stuff online, back in the 80s and the 90s it was still a novelty. To have it before kinda felt like how it feels to have an iPhone when it first came out, and you were the first one to have it in class. There was a cool factor to it back in the days, but just like everything in life, too much of a good thing becomes bad for you, and nothing is more evident in today’s world as year after year we see the steady rise of consumer credit card debt worldwide. Consumer’s addiction to debt is at an all-time high right now, you see credit card offers arriving in your mail the moment you turn 18, and it just never stops until the day that you die. It’s very important that you know how to manage it, and be informed enough to know its ins and outs in order for you to use it to your advantage. A debt is a double edge sword, it could either make or break you, the outcome is totally dependent on how you manage it.
What happens if I don’t use my credit card for a month?
Not using your credit card for a month doesn’t affect you in any way, not using it in the short term is basically harmless. But what could be a problem though is when you don’t use it long term. One of the main effects of not using it for a while (more than 1 year) is card cancellation by your issuer. A cancellation could affect your credit score drastically, an instant nosedive of your FICO score should be expected, but a credit card cancellation usually happens only if you don’t use it for more than a year or more, so if it’s just for a month then you’re pretty much on the clear. Another problem that would arise from it is they would cut your credit limit by a big percentage. Though not as bad as an account cancellation, still,it will affect your credit score. So a straight-up answer to your question is a no. Not using your credit card for a month is insignificant in terms of your personal financial health, but if it’s more than a year then you should start monitoring it closely because an account closure or a credit limit cut could just be around the corner.
Will my credit card close if I don’t use it?
First, I would like to explain why your card issuer could cancel your account if you haven’t used it for more than a year, and the reason why they’d want to do that is purely business. They need you to keep using your account to generate interest and processing fees which translates into revenues for them. The less active you are as a credit card user, the more is their maintenance cost of keeping you as a client, so there will come a point that the cost of keeping you as a client wouldn’t make sense for them anymore, so it helps to play a balancing act with your credit card issuers if you’re not that active of a user. Just do enough to make them not cancel your account. If you ask me, it’s more of an art form than a science, but as long as you get the concept, then you’re better equipped to deal with the different scenarios that could arise in the future.
Do unused credit cards hurt your score?
As for your credit score, the cliff dive will only happen once your credit card issuer cancels your account. Shutting down a tradeline directly affects the credit utilization ratio on your credit report. A credit card account is classified as a revolving trade line on your report. It’s one of the main components of the FICO scoring model formula, so any changes to that are considered a major event on your personal credit report The optimal credit utilization ratio should be at a combined ratio of 30% or below. When one of your cards is closed, given that you don’t do anything on your debt balance and everything stays constant, your credit utilization ratio will automatically go up (when the ratio goes up, your score goes down), and that’s where the problem happens, 30% and below is the optimal credit utilization ratio for all, you should just be hovering around that magic number. Below is a before and after example of how credit utilization works.
Sarah has a 640 FICO credit score with the following credit utilization ratio for all her revolving lines of credit.
|Credit Card||Capital One||Bank Of America||Discover||Amex||Total|
|Credit Utilization Ratio||70.%|
Here’s a simulation after she brought her credit utilization ratio down to around the 30% range.
|Credit Card||Capital One||Bank Of America||Discover||Amex||Total|
|Credit Utilization Ratio||26.6.%|
And FICO score after the credit utilization ratio adjustment would be around 720. That’s an 80 point jump in 45 days. If you want to put that difference into perspective here a myfico on the savings you could get on a $500,000 30-year Fixed mortgage with that kind of credit score jump
|FICO Score||APR||Monthly Payment||Total Interest paid|
If you see the above table. If your score changes from 640 to 760 to 850 you could $156,117. $135,352 if your score is at 700-759, $118,548 at 680-699, $97,939 at 600-679 and $55,577 at 640-659.
What is a FICO score?
A FICo score is a numerical representation of your report that is being used by 90% of the lenders in America to gauge your creditworthiness. You can learn more about FICO scores in detail and its mechanics here.
How to use a credit card wisely to build credit?
In building credit wisely with your credit card the most important thing are the following
1.Never be late on your payments
A late payment could shave off up to 180 points off your credit score. Generally the higher your score the steeper you credit score drop would be too. In addition to the damage to your credit score here are some more negative effects of being late on your credit cars
- They’ll cancel your 0% introductory APR
- Interest Spike.
- Late Payment Fee.
All of the above effects can be found on the fine print that came with your card. Credit card companies would bury all their stipulations there using very small fonts sandwiched between different confusing legal jargon to discourage consumers from reading it. By law, they have to inform consumers of everything and that’s the loophole that they’ve found to effectively run their business models. Although most consumers will be tempted not to go through the fine print, it’s the responsible thing to do to go through it. That extra ounce of due diligence could go a long way.
Here are some fico simulated data that highlights the impact of late payments on your FICO score. It varies from one credit to another so it’s good to look at this so that you more or less grasp the concept of how credit scoring works.
|Current FICO® Score 9||607||793|
|Miss a payment by 30 days FICO® Score 9||570-590||710-730|
|Miss a payment by 90 days FICO® Score 9||560-580||600-680|
If you look closely at the table above the higher your score is, the steeper is the drop after a late payment. Sofia, who has the lower score of the two, got a 17 to 37 point drop while Maria got 63 to 83 points off for a 30-day late payment.
2. Always use 30% or less of your total credit limit.
Using more than 30% will send your credit scores spiraling down. Here’s another table comparison between two credit profiles
|Current FICO® Score 9||607||793|
|Reduce revolving account balance by 25%||615-635||795-815|
If you look closely above, the reduction of the revolving account balance by 25% created an 8 to 28 point FICO score increase for Sophia and a 2 to 22 point increase for Maria. But based on my experience if you bring your credit utilization ratio down to 30% or below the increase is dramatic. I’ve seen 50 to 100 point increases in 45 days sometimes.
3. Use your credit card responsibly
Know the mechanics of how a credit card works, it’s little features and promos, and use those little things to your advantage. I know an eBay-amazon arbitrage seller who uses his Chase Amazon credit card with a rebate of 5% to run his business. Every year he’s making $180k off on rebates alone. Below is a list of tips on how to use your card responsibly.
- Pay your balance every month
- Get fraud and Purchase protection
- Use a card with rewards,
Now, if you’re just starting out to build credit, I suggest the following:
- Ask someone to add you as an authorized user to their card
If you can find someone with a great credit score to add you as an authorized user to their credit card, then your credit score should be in the high 740s given that you don’t have any derogatory remarks on your credit report. This is how I first got introduced to the world of credit scores, thanks to my mom. I tried to get a car on my own back in the day and the dealership denied me. Went back home and told my mom about it and told her that I need to build credit so that maybe I could get a car to my name in 2 years, because that’s how long it would take to build credit from scratch, said the car dealership salesman. She smiled and told me you don’t know how lucky you are to have me as your mom. You’ll have a very good credit score in 2 months, then we’ll get you that car that you want to your name. The moment I heard that it was like discovering for the first time that your mom is a superhero. Up to now at 57, it still brings me a smile on my face reminiscing that moment. But to make the long story short, she added me as an authorized user to 3 of her credit cards and I got a 740 credit score in 45 days. It was amazing, and hope you guys could take advantage of this legal loophole too. There are firms out there that could provide you with this kind of service if you don’t anyone. Just be careful and always do your due diligence.
2. Open a secured credit card
Now if you can’t find anyone to add you as an authorized user and would rather start from scratch I suggest that you open a secured credit card in that way you don’t accumulate too much inquiry looking for the right credit card to approve you from scratch.
What is a secured credit card?
It’s a credit card that uses your own money as collateral for the amount of line of credit that the credit card issuer gives you. The benefit of this is that you’d know that you will get approved right away because you’re using your own money to guarantee the lines. Unlike unsecured credit cards, they approve you based on your creditworthiness, but with this one, you need to have a credit history to get approved. That’s why this is perfect for consumers who are just starting to build credit on their own. You don’t have to incur hard inquiries from the multiple credit pulls that you’d be doing just to get approved for different credit cards. A