Are you planning to splurge and give in to several discount offers this holiday season? A viral TikTok video explained why you should not spend everything that you have on your credit card.
Credit Card Score Calculator
For those who does not know, credit card score, which is often called as a FICO score, was developed by the company FICO, per Investopedia.
The said company is a data analytics firm previously recognized as the Fair Isaac Corporation.
Lenders use borrowers' FICO scores, along with other characteristics on borrowers' credit card records, to assess credit risk and determine whether to grant loans.
Moreover, it is worth noting that FICO is not the only type of credit score available, but it is among the most used by lenders to assess the risk of doing business with a borrower.
In case you are curious how your credit card score was calculated, there are several factors that FICO scores take into consideration when determining trustworthiness.
The said factor includes payment history, the current amount of credit, types of credit used, length of credit history, and new credit accounts.
Payment History
Payment history considers whether you have paid your credit cards on time and in a regular manner. Aside from this, previous bankruptcies, collections, and delinquencies are also considered.
With regards to its percentage, Investopedia stated that it affects 35 percent of the credit card score. This only means that the credit card score will likely be decreased in case you have a bad credit payment history.
Current Amount of Credit
Meanwhile, the second largest factor is the amount you currently owe to the company as compared to the credit you have available.
Borrowers that consistently spend up to or above their credit card limit are considered risky by credit score formulas.
Though this section of your credit score concentrates on your current debt, it also considers the number of accounts you have open and the kinds of accounts you own. This only means that a significant overall amount of debt from a variety of sources will lower your credit score.
Period of Credit History
To provide much clarity of what length of credit history is, Investopedia explained that the more active and in great standing credit accounts you have, the better.
For instance, a person that hasn't missed a payment over 20 years is a better example than someone who has been paying on time for two years.
Latest Credit Accounts
Moreover, people who seek credit frequently are more likely to be under financial stress. This only means that every time you request credit, your credit card score decreases.
Prior to opening a new credit account, it is worth considering if the extra credit is worth the reduction in your credit score.
Organized Mixed Credits
For a detailed explanation, lenders like to see a well-balanced credit profile that demonstrates your ability to manage several forms of credit.
Simple Tip to Prevent Credit Card Score from Decreasing
Viral TikTok user Erika Kullberg has shared a simple tip for everyone to prevent credit card scores from decreasing.
In her TikTok video, she stated low credit card score will likely affect several factors such as buying a new house or getting a loan.
However, to prevent it from occurring, she advised that people should only spend 30 percent or less of the credit card limit. This process is called the credit utilization rate.
Kullberg exampled that for every $1,000 credit card limit, you should spend only $300 or less. If you spend more than the said percentage, the credit card score will start to decrease.
Apart from FICO's and this tip, an online credit card score calculator will be useful to know more about your finances.
@erikakullberg How to properly use your credit card #personalfinance #moneytok #creditcard ♬ original sound - Money Lawyer Erika
