You probably ran up charges on credit cards over the holidays. Enjoy the goodies. And now, make sure to avoid damage to your credit score. In fact, you should aim to beef up your score, says Benjamin Glaser, features editor with DealNews.com.
Why? Very few consumers understand how a good credit score can save them big bucks and buff their financial profile.
It can also turbocharge your retirement planning, Glaser says.
One key step for protecting your score is to make payments on credit-card bills on time. Most people are aware of that.
Another key step is to use as little of your available credit as possible. Few people know the value of what lenders call low utilization, Glaser adds.
Many people think that the best way to have a good credit score is not to take out credit at all, Glaser said. The truth is actually the opposite. You need to have open credit that you are not using to help boost your score.
One way to achieve it is to open a no-annual-fee credit card in 2016. Then spend very little with it. This will increase your open credit while decreasing what banks call utilization, which is the percent of your available credit that youre actually using, Glaser said. Lower utilization is good.
The portion of available credit that you utilize is just one part of your credit score, but its a key part. And most consumers are not even aware that its part of it, let alone that high utilization hurts your score, Glaser said.
Many consumers think its perfectly OK to use as much credit as the lender or card issuer offers you. It isnt, Glaser said. Your credit limit is not a goal or a suggestion. Just the opposite. Keep utilization under 30% is your real goal.
If a lender or card issuer says that you can borrow up to, say, $10,000, dont let your balance rise above $3,000, Glaser suggests.
Most credit scores range from 300 to 850. Generally, the higher your score, the less a lender or card issuer will charge you in interest.
A score below 600 is poor, Glaser says. A score of 700 is good. And a score above 750 is excellent.
In 2012, credit card holders with scores of 620 to 659 paid interest rates that averaged 20.3%, Glaser says. Consumers with scores above 720 paid interest rates averaging 12.9%.
Take a consumer with a $5,000 balance that he paid down by $150 per month. Consumers with the best credit paid a cumulative total of $1,235 in interest, Glaser says. Consumers with scores of 620 to 659 ended up paying about double, $2,421.