How Paying The Minimum On Your Accounts Impacts Your Credit Score

                                                                                         

A leading credit expert recently released a report regarding your credit score that is contrary to traditional wisdom. This study states that your best choice is to pay the minimum amount due on your credit cards each month, and take the money that you were going to pay more than the minimum and put it into a savings account. This savings account would only be used for emergencies that will almost unavoidably come up.

There is a bit of good advice and wisdom in this statement. Most individuals, when presented with a financial emergency, do not have access to the financial resources to accommodate it. They end up finding personal loans or borrowing from family members to take care of the emergency, or possibly taking out a cash advance on several credit cards to take care of of whatever emergency came up.

It is a good idea to have access to an emergency fund since life almost guarantees that unforeseen financial things will crop up at times. You must remain practical about what defines emergency also, as that would NOT include purchases like a 50 inch plasma TV going on sale, or a blowout sale on the newest Coach purses. More often than not, an emergency would be defined as unforeseen medical or hospital care expenses, or perhaps you need some significant repairs to your auto, perhaps your son or daughter's tuition bill at school are payable next month and they forgot to tell you, or a host of other possibilities.

However, there are multiple issues with this approach which cause it to fall into the category of not being good advice, in spite of the credentials of the reputable individual who published the statement. First Off, you need to look at the bigger credit picture. Based on the current average interest rates on credit cards, you are probably being assessed about 18% or even more in interest on your unpaid balance. If on a $3500 balance you merely pay the minimums every month, it will require more than 20 years to pay that off, and you will have paid more than twice the beginning balance in interest alone. And that statement presumes that you do not charge anything more to that account in the interim.

To make matters worse, consider that you might in best case get as high as 3% interest on a emergency account, and it does not take a rocket scientist to see where you are paying out more money. From your credit score view, paying the minimums every month really does keep your credit score intact and your debt holders pacified, but at a tremendous expense to you.

The additional problem is one of discipline. Say you apply this strategy and in a number of months you have accumulated about $10k in your savings account for that emergency. So while you are reading the Sunday newspaper, you find that Best Buy is starting a huge sale on plasma TVs. In spite of your continual hope to pick up one of those newest televisions, do you possess adequate discipline to not dip into your emergency fund and picking up one of those plasma TVs? Many people would have to honestly say that the enticement to do this would likely be beyond their power to resist.

The best means to maintain your credit score as high as feasible is to at least keep your outstanding balance as low as about 20-25% of your account credit limit and to make your payments in a timely fashion every month. After you get to that level, THEN you may elect to implement this method for adding to an emergency account and it would still keep your credit score without costing you a huge amount in interest. Closing the account totally is not a good idea because then you do not have an ongoing history with that account, and remember that your credit score is a figure computed from your credit history over time.

Consider carefully what actions you perform that will impact your credit score since that is a changing number that you must maintain as high as possible at all times. Doing so will benefit you in numerous ways than you probably even understand.

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