The Other Cost of Credit
by Joseph Lizio - November 30, 2009
When most individuals think about the negative connotations regarding their personal credit histories; specifically what costs these scores may hold when credit goes bad, they tend to think about the costs in terms of being denied credit when it is needed most or the high interest rates and fees associated with poor credit scores.
But, there are also high costs in maintain good credit.
To maintain great or even good credit usually means using your credit and it is this use that has costs associated with it.
Some of the most important items in maintain good credit scores and their costs are:
Credit must be used but not abused. Most credit bureaus calculate the difference between the amount of credit available (usually revolving credit like credit cards) and the amount being used. Thus, if you have $20,000 in revolving credit available to you but only have outstanding balances of $2,000 it shows that you are managing and not abusing your credit. The opposite is true as well. If you have $20,000 in revolving credit but have maxed out the full amount, then it shows that you are abusing your credit and your score falls.
Therefore, the goal is to have as much revolving credit available to you but not really use it. However, this can mean applying for credit that you really don't need. One cost that can be associated with having and maintain credit accounts you don't use is that some creditors will charge fees (like annual fees) just for having an account with them. Closing these accounts can save you these fees but will also hurt your credit score.
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Further, in today's credit market, if you don't use your credit accounts, your creditors will close them without warning. Again, closing these accounts and reducing the difference between what is available and what is used can really hurt your credit score. Thus, you have to use these revolving accounts (which usually means using your credit cards even when you have the cash on hand to pay for your purchases). This also means buying items you don't want or need or trying to find ways to keep balances on these accounts - balances that are unnecessary especially when you get charged interest and fees for these balances. Both of which cost in terms of spending money that does not need to be spent or paying avoidable interest and fees.
My wife and I try to rotate our credit cards in an attempt to keep small balances on each one of them each month. We also pay off these balances each month (trying to reduce the overall costs of holding these accounts). But, before online bill pay, we were also having to pay additional costs like envelops and stamps in mailing all these payments to difference credit companies (very thankful for online bill pay) as well as the time and effort it takes to monitor and manage each account. Additionally, by spreading out or rotating our charges, we are no longer able to take advantage of the best rewards programs to their fullest. This is actually a cost to us in missed opportunity costs or in getting some return on the money we spend in their form of cash back or other rewards.
However, we think that these additional costs are worth the trouble because in today's world, it is only your credit that matters too many companies from banks and lenders to employers, insurance companies and the likes. But, these costs are really not our choice as they are a result of the rules set in place by the credit reporting agencies - something that most credit companies what to keep in place as they force you to use their credit products.
So, in maintain your credit and trying to show how well you can and do manage your credit - based on their rules -creates additional, but unnecessary, cost to borrowers.
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The Other Cost of Credit - Business Money Today