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Wyandotte, Mich. — October 13, 2020 — With reports on credit card spending reflecting a small jump as some people move from cash to credit, there has also been an unprecedented paying down of credit card debt during the pandemic. Michigan Legacy Credit Union (MLCU) CEO and President Carma Peters, says with so much attention directed to credit card trends, it’s a good time to review some of the basics on how credit scores are determined – and how to keep them in the positive range.
“Among our 20,000 members, we are seeing an overall increase in credit card spending; however, more member/owners are working to pay off balances by reducing their credit card debt,” Peters said. “Our message regarding achieving or maintaining a solid credit score is to pay your bills on time, keep your balances below half the limit and, most importantly, watch the interest rates on your credit card accounts.”
Peters reviews key information about credit scores here:
- A credit score is comprised of five main factors: payment history (30%); amount owed (35%); length of credit history (15%); new credit (10%); and credit mix (10%).
“Creditors will look at your ‘capacity’ – how much credit you have and how much you have used – as well as where you normally keep your balances in relation to limits,” Peters said. “Once one’s balance is more than 50% of the maximum credit limit, their credit score can be lowered significantly. FICO identifies the optimal available credit to maximum credit limit relationship as 30%.”
2. Having a zero balance on your credit score is fine, but…
“There is no negative impact on having a zero balance. However, it is best to use a card at least quarterly to keep it active,” Peters said. “Active credit trade lines are considered in a credit score by credit agencies even if they have a zero balance – as long as at least one purchase is made with the card quarterly. If not, it will drop off as an active trade line.”
3. How are zero balances reported by credit scoring companies?
“Zero balances reflect that you have 100% of your capacity available on a particular card, as long as the trade line remains active,” Peters said.
4. How can I improve my credit score?
“The best way to improve a credit score is to pay down open-ended credit lines when the balance due is more than 50% of the limit. Credit cards and lines of credit are both considered credit lines,” Peters said.
5. The easiest way to lower your credit card debt? Lose the department store credit card
“Pay attention to the rate boxes on your credit card statements that show the minimum balance and the number of years it will take to pay it off,” Peters said. “By transferring a national department store credit card balance at 27% or higher to a card with a lower interest rate, you can save thousands of dollars and years of payments.”
Peters also reminds credit card holders of changes introduced this year by FICO which put more emphasis on credit card usage trends, looking at consumer payment and debt history from the previous 24 months. Putting a plug in for her industry, Peters notes that credit unions may offer greater flexibility and use of non-traditional approaches to meet borrowers’ credit needs.
“With a member-ownership approach, credit unions are available to assist individuals by providing more information – or reassurance – when they are unsure about their credit score,” Peters said. “We also have local decision-making authority, rather than relying on auto-generated, formulaic determinations of credit-worthiness, as is common among traditional banks.”
About Michigan Legacy Credit Union
Michigan Legacy Credit Union (MLCU) is a member-owned, not-for-profit financial cooperative serving members who live, work, worship, attend school, or own a business in the state of Michigan. With six physical branches in Flat Rock, Garden City, Highland, Pontiac, Warren and Wyandotte, and a mobile app that provides credit union services—such as opening an account, changing an address, applying for and closing on a new loan, including mortgages—via a virtual video teller, Michigan Legacy Credit Union is committed to providing quality financial services at a competitive price, delivered professionally and efficiently while keeping member/owners and their needs first. For additional information on MLCU, visit: www.michiganlegacycu.org.