How Paying The Minimum On Credit Accounts Impacts Your Credit Score

A reputable credit expert recently released a report in regard to your credit score that is contrary to traditional wisdom. This paper says that your best option is to pay the minimum amount due on your credit cards each month, and take the money that you had the ability to pay extra and put it into a savings account. This savings account should only be utilized for emergencies that will almost inescapably arise.

There is some sound advice and wisdom in this advice. Most individuals, when presented with a fiscal emergency, do not have access to the financial resources to accommodate it. They end up acquiring personal loans or borrowing from friends to take care of the emergency, or possibly getting a cash advance on a number of credit cards to take care of of whatever emergency came up.

It is a good idea to have access to an emergency account because life almost guarantees that unforeseen financial matters are going to pop up from time to time. You must be realistic about what determines emergency also, since that would NOT include things such as a 50 inch LCD TV going on sale, or a gala sale on the newest Coach purses. By and large, an emergency would be defined as unanticipated medical or hospitalization expenses, or possibly you require some major fixes to your car, maybe your son or daughter's tuition fees at school are payable next week and they forgot to tell you, or a number of other possible things.

However, there are multiple issues with this approach which cause it to fall into the class of not being good advice, despite the credentials of the reputable individual who made the findings. Foremost, you need to look at the larger credit picture. Based on today's average interest rates on credit cards, you are in all likelihood being charged about 18% or even more in interest on your outstanding balance. If on a $3000 balance you just pay the minimums each month, consider that it will require more than 16 years to pay that off, and you will have paid more than double the beginning balance in interest charges alone. And that presumes that you do not charge anything else to that credit account in the interim.

Now consider that you might in best case get as much as 3% interest on your savings account, and it does not take a rocket scientist to determine where you are paying more money. From your credit score perspective, paying the minimum amount every month does indeed keep your credit score intact and your debt holders happy, but at a tremendous cost to you.

The additional problem becomes that of discipline. Suppose you apply this advice and in a number of months you have been able to save approximately $10k in your savings account for that emergency. So while you are browsing the Sunday newspaper, you find that your local electronics retailer is starting a huge sale on LCD TVs. Despite your continual hope to pick up one of those newest televisions, do you have enough discipline to avoid dipping into your emergency fund and getting one of those plasma TVs? Many people would have to honestly state that the enticement to do this would probably be outside of their power to withstand.

The ultimate method to maintain your credit score as high as feasible is to at the least maintain your current 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 point, THEN you might want to elect to adopt this approach for adding to an emergency fund and it would still maintain your credit score without costing you a great deal in interest. Closing the account entirely is not a sound idea because then you do not have an ongoing history with that account, and remember that your credit score is a number calculated from your credit history over time.

Consider carefully what actions you perform that will have an affect on your credit score since that is a ever-changing number that you need to keep as high as feasible at all times. Doing this will benefit you 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