Editorial Policy

Don't rely on credit cards when income isn't steady

Erica Sandberg

September 17, 2015

QHi Erica,

I'm a freelance writer and content producer. Sometimes my clients take a long time to pay me, and then I end up using my credit card as a float. I don't technically have any debt because I always (eventually) get paid and then I pay the card off to zero, but I'm afraid this is affecting my credit because sometimes my balance is at my limit. Am I doing the right or wrong thing for my credit? 
— Sara P.

ADear Sara P.,

All this charging is certainly affecting your credit rating! To understand how, you need to know the way credit scores are developed.

Every credit scoring system taps into the activity listed on your consumer credit reports. Each credit report gets scored individually, as the reporting companies are separate businesses. The most common credit score is FICO, so I'll concentrate on that.Ask Erica

The biggest factor in a FICO score is the way you've been making your payments. I get the sense you've been meeting at least the minimum during lean times. If that's correct, you're doing well. Conversely, if you've been skipping entire billing cycles (not just paying a few days after the due date when you'll be assessed a fee but not a credit reporting ding), your score has been negatively affected by the recorded “lates.”

Then there's credit utilization, which is the second most important scoring factor. I'm afraid this is where you've been faltering. For this portion of your score, FICO rates the total debt you hang on to relative to the amount you can contractually borrow. A general rule of thumb is to keep at least 70 percent of the line free. Because you routinely max out your account and push a large portion of the debt to the next month, your score has likely taken a hit. However, you still have a history of erasing the bill to zero and while that may not be enough to counteract the credit utilization problems, it should be clear that you are a responsible person in the end.

Take a look at the FICO score associated with at least one of your credit reports (available from my.creditcards.com). Credit scores range from 300 to 850, and an excellent score is 750 and above. Use that figure as a benchmark to hit and then maintain. You'll get there by establishing a lengthy history of charging, making on-time payments, and staying close to no revolving debt.

Now to address your money management issues. Many people who are paid sporadically struggle to cover regular bills. When cash flows irregularly it can get terribly complicated, as you're always waiting for the next big check to arrive. In the meantime you run short and start charging to make up the difference.

It's time to jump off this rotten roller coaster and do the following:

1.    Eliminate surprises with a budget. Make a list of all your monthly and periodic expenses. Amortize those that come up occasionally. For example, if you always spend about $800 on Christmas, divide that figure by 12. Add $66 to your monthly expenses to plan ahead and avoid relying on credit cards later.

2.    Conservatively estimate your income. What is the least amount of money you are sure to earn in a year, after all taxes and deductions? Divide that number by 12. Doing this helps prepare you for the tightest months — and you will be pleasantly surprised when all the checks roll in on time.

3.    Subtract your expenses from your income. Say you need $2,500 for your lifestyle and you bring in a guaranteed $3,000. Great. You should have $500 left over, which can go directly into a savings account.

4.    Check in regularly. Never take your eye off your checking account balance and budget. Create a daily routine of seeing how much you have in your bank account and comparing that to upcoming bills. Scale back on spending when you notice you're running short.

5.    Only use credit cards when you know you'll repay the balance in 30 days. This is the tough one, but I want you to make a personal challenge. Think long and hard before each charge. Do you feel certain that the growing balance will be within your means? If so, swipe; if not, don't. You'll be saving yourself not just credit scoring problems, but costly finance fees and difficult payments.

Trust me, Sara, you can do this. It just takes awareness and dedication.

Got a question for Erica? Send her an email.

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