Do You Owe Too Much on Your Credit Cards?

It's often easy to dismiss how much we owe, until the bills come, or we have a need for a new loan, but handling your money with finesse will give you financial peace of mind.

According to the Fair Isaac Corporation (FICO) approximately 30 percent of our credit score is calculated based on how much we owe. But how debt much is too much debt?

Certainly, you are in the best position to determine how much debt you can afford to carry. However, if you are looking to raise your credit score, qualify for a good mortgage interest rate, or to ensure your financial future is at low risk, ask yourself the following questions:

Do you have high credit card balances? If you have credit cards that are maxed out or have balances close to the credit limit, you are sending the message to the credit world that you are over-extended. This will lower your credit score and raise your interest rates lickety-split.

Pay off or whittle down your credit card balances to at least fifty percent or less of your credit limit. (Meaning, if you have a credit card limit of $10,000, then your goal is to have less than $5000 in charges.)

Do you jump at zero percent financing? The offer in your mailbox may be too tempting to refuse. Why not shuffle your balances from higher interest rate cards to a zero balance offer?

First, this practice will ding your credit report, not help it. Paying down your credit is the most effective way of raising your score.

Second, most zero percent offers have unfavorable terms including processing fees, extremely high interest default rates if you are late with a payment, and high interest charges if you do not pay off the full amount by the promotion end date. This will result in paying more on your debt than you would have spent, had you stuck with your original plan and paid the debt down.

Do you open store accounts just to get a free gift or percent off your sale? The free umbrella they are offering is "oh so cute," but there's trouble around the corner if you fall for the promotions one too many times.

Opening new accounts can actually lower your credit score. In addition, you may wind up with a ridiculously high percent rate added to your charge if you are unable to pay the bill in full when it arrives. That free umbrella could cost you a pretty penny in the end.

Do you charge everyday items like gas, coffee, and groceries? Unless you are using a bank card directly linked to your checking account, this is not a recommended practice. With gas prices already high, adding monthly interest charges to the mix is not in your best interest. Charging every day items can also lead to over-spending. Your credit card may offer a neat point program for charging your every day purchases, but no matter how many points you accumulate, you'll never make up for the interest charges you accrue.

Do you manage your installment loans well? Are you current with your car loan, mortgage payment, or student loans? Missing payments or defaulting on an installment loan can have a serious impact on your credit rating and financial future. Be sure to treat these loans with care and make your payments on time.

Do you owe on too many accounts? A little here, a little there... what's the harm? Even if you are carrying low balances on every card you own, if your debt is too spread out, it harms your credit rating. You may also being paying interest that you could be keeping in your savings. Pay off the lowest balance first, then tackle the next.

Do you have any accounts in collections? Pick up the phone right now, call the collection agency, and make arrangements to pay them off. Collection agencies will work with you to find a payment plan you can handle, even if it's a few dollars a month. If you pay the obligation off, it will reflect favorably on your credit, and some times can even be removed from the credit picture, all together.

Do you want to cut up your cards and close unused accounts? Feel free to get out the scissors and clip those cards to shreds, but unless you have absolutely no impulse control, re-consider closing the accounts.

Closing too many accounts at once will have a negative impact on your credit score and will send a signal to lenders that you have difficulties managing your credit (whether it's true or not, this is most often how they look at it.) Closing the accounts will also instantly lower your debt ratio, which means you will still owe the same amount but have less credit available. This also has a negative impact on your credit score.

Taking a hard look at your finances can be painful, but keeping your spending habits in check will lead to a lifetime of financial freedom!

Want more information? Check out How To Obtain Your Credit Score and 10 Easy Ways to Raise Your Credit Score