A noted credit expert recently published a study regarding your credit score that goes up against established wisdom. This paper says that your best choice is to pay the minimum amount due on your credit cards every month, and take the amount that you were going to pay extra and put it into a savings account. This savings account would be used for emergencies that will unavoidably arise.
There is some well-grounded advice and foresight in this advice. Most individuals, when faced with a fiscal emergency, do not possess the financial means to handle it. They end up finding personal loans or borrowing from friends to accommodate the emergency, or maybe taking out a cash advance on multiple credit cards to handle of whatever emergency came up.
You should have an emergency account since life almost guarantees that unforeseen financial matters will crop up on occasion. You must remain realistic about what defines emergency also, since that would NOT include purchases like a 50 inch plasma TV going on sale, or a gala sale on the latest Coach purses. By and large, an emergency would be defined as unanticipated medical or hospitalization expenses, or possibly you require some major repairs to your auto, perhaps your son or daughter's tuition fees at college are payable next week and they forgot to tell you, or a host of other possibilities.
However, there are many issues with this method which render it as falling into the class of being poor advice, despite the credentials of the reputable individual who made the findings. Foremost, you need to examine the bigger credit picture. Based on the current typical interest rates on credit accounts, you are likely being charged about 18% or more in interest on your outstanding balance. If on a $2500 balance you only pay the minimum due each month, it will take you more than 17 years to pay off, and you will have paid more than double the outstanding balance in interest charges alone. And that statement presumes that you do not charge anything else to that account in the interim.
To make matters worse, consider that you might in best case get as much as 3% interest on your emergency account, and it does not require anyone to be a rocket scientist to realize where you are paying out more money. From your credit score perspective, paying the minimum due each month does indeed keep your credit score intact and your creditors pacified, but at a huge expense to you.
The additional trouble becomes one of discipline. Assume you apply this advice and over a number of months you have accumulated approximately $10k in savings for that emergency. Then while you are glancing over the Sunday paper, you find that your local electronics retailer is having a huge sale on LCD TVs. In spite of your long lasting want to pick up one of those fancy TVs, do you possess adequate discipline to avoid dipping into your emergency account and getting one of those LCD TVs? Most consumers would have to candidly state that the temptation to do this would probably be outside of their ability to withstand.
The ultimate means to maintain your credit score as high as feasible is to at the least maintain your outstanding balance as low as about 20-25% of your account credit limit and to make your payments in a timely fashion each month. After you get to that level, THEN you may elect to adopt this approach for adding to an emergency account and it would still maintain your credit score without costing you a mint in interest. Closing the account entirely is not a good thought since then you do not have an ongoing history with that credit card, and remember that your credit score is a number computed from your credit history over time.
Consider carefully what actions you take that will impact your credit score since that is a changing number that you need to keep as high as possible at all times. Doing so will give you an advantage in numerous ways than you probably even realize.
For more insights and additional information about what you must know about raising your
Credit Score as well as getting free copies of your credit report to ensure that your credit score is as high as it should be, please visit our web site at http://www.credit-help-center.com
