THE GOOD LIFE

I have had several great comments regarding the personal finance posts over the last few days! Thank you for reading and interacting. It is much appreciated!

I wanted to reply to a comment by my friend Laura who was looking for clarification on one item, and had an excellent question regarding the effect of carrying a balance on a credit card or paying the card off every month on the credit score. Here is what I was able to find:

In Step 1, during the savings process, I mentioned that you should pay the minimum on all of your bills in order to save the $1000. Laura pointed out that for some individuals, debts such as credit cards are paid off every month. If this represents you personally, focus on spending less on your credit cards during your savings period so that your total expenditures are less, making it easier and faster to save. Otherwise, pay off the cards every month without worry, especially if you are making good progress in saving.

The second point was regarding the effect of paying off a credit card every month vs carrying a balance on the card. The answer to this is: pay off your card every month. I don’t know the exact effect to the credit score compared to carrying a balance, but there is an effect, and it is better overall. Now, if you were to carry a balance, the credit bureaus recommend that you carry a balance no more than 35% of your available credit limits. “For instance, if you have a credit card with a $1000 limit, you should try to keep the balance owed below $350″ (TransUnion, 2008). This rule applies to each account individually (35% on the Chase card, 35% on the Bank of America card etc.). I also heard though on a radio show that you also want to keep your totall revolving debt (credit cards typically) at or below 35% as well. This will help to prevent “over extension” as the credit bureaus call it which can effect your scoring and risk factors.

So, to recap:

• Pay the minimum on your accounts while you save. If you pay off your card every month, you are a lucky person, but if you are trying to work on Step 1, charge very little to your credit cards until you have the emergency savings built up so that you dedicate your funds to savings.
• While paying off your cards every month is better than carrying balances, keeping your balances at or below 35% of your available credit limit, both per account and collectively, will have a positive effect on your credit score.

I want to mention here that I am not a credit counselor, and I recommend that you contact the credit bureaus directly if you have questions about specifics on your credit report. TransUnion is the only bureau that I know has a customer service line where you can speak to someone directly. You can call them at 1-800-916-8800 and press menu option 3.

I hope that is helpful to everyone and answers your question Laura!

Brent