A reputable credit expert recently published a paper in regard to your credit score that goes up against traditional wisdom. This study says that your best bet is to pay the minimum amount that is due on your credit cards every month, and take the amount that you were going to pay extra and drop it into a savings account. This savings account should only be utilized for emergencies that will unavoidably arise.
There is a bit of good advice and wisdom in this statement. Most consumers, when presented with a fiscal emergency, do not have access to the financial means to handle it. They wind up acquiring personal loans or borrowing from family members to handle the emergency, or perhaps getting a cash advance on a number of credit cards to handle of whatever emergency came up.
It is a good idea to have an emergency fund since life virtually guarantees that unforeseen financial things are going to crop up now and then. You must remain practical about what determines emergency also, as that would NOT include things such as a 50 inch LCD TV going on sale, or a blowout sale on the latest Coach purses. More often than not, an emergency would be defined as unanticipated medical or hospitalization expenses, or possibly you need some significant fixes to your auto, perhaps your son or daughter's tuition bill at school are due next week and they neglected to inform you, or a host of other possible things.
But there are multiple issues with this method which cause it to fall into the category of being bad advice, in spite of the normally good advice of the respected person who made the report. First Off, you must consider the larger credit picture. Based on the current average interest rates on credit cards, you are likely being assessed about 18% or more in interest on your unpaid balance. If on a $3000 balance you only pay the minimum due every month, consider that it will take more than 16 years to payoff, and you will have paid more than double the outstanding balance in interest alone. And that assumes that you do not charge anything else to that credit account in the meantime.
Now consider that you may get as high as 3% interest on your emergency savings account, and it does not require anyone to be a rocket scientist to see where you are paying out more money. From a credit score view, paying the minimum amount every month does indeed keep your credit score intact and your debt holders pacified, but at a great cost to you.
The additional issue is one of discipline. Assume you apply this strategy and over time you have accumulated approximately $10k in your emergency account for that emergency. Then while you are glancing over the Sunday newspaper, you find that Office Max is having a huge sale on LCD TVs. Despite your continual want to pick up one of those newest TVs, do you possess enough discipline to avoid dipping into your emergency fund and getting one of those plasma TVs? A majority of consumers would have to frankly state that the temptation to do this would be beyond their ability to withstand.
The ultimate method to maintain your credit score as high as possible is to at the least maintain your current balance down to about 20-25% of your credit limit and to make your payments in a timely fashion each month. After you achieve that point, THEN you might want to choose to adopt this method for adding to an emergency account and it would still maintain your credit score without costing you a great deal in interest. Closing the account completely is not a sound thought because then you do not have an ongoing history with that credit card, and keep in mind that your credit score is a figure calculated from your credit history over time.
Carefully consider what actions you perform that will impact your credit score since that is a dynamic number that you need to maintain as high as feasible all the time. Doing this will give you an advantage in numerous ways than you probably even recognize.
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
