When it comes to finances, credit cards can be both a boon or a detriment. On the one hand, credit cards can oftentimes be forgotten or hard to keep track of, or even worse, the line of credit that builds up a balance could accrue additional interests. However, if used correctly a credit card can also be a useful tool when it comes to budgeting and managing finances. Additionally, it is vital to building a good credit score in the long run.
What to Do
One of the most important things to keep in mind when owning a credit card is the payment date. A late payment on the credit card will be a signal to the creditor that the customer may be irresponsible with their finances; thus, they will report a late payment or delinquent payment to one or all of the credit bureaus (Experian, Equifax, and Transunion). Once this happens, a credit score can drop anywhere between 20 to 60 points! This is a significant drop that could mean the difference between a great loan and a horrible loan in the future. So it’s important to pay all monthly payments on time even if the payment is the minimum amount. The best tip to avoid any late payments is to set an automatic monthly scheduled payment to pay AT LEAST the minimum amount.
Another important thing to note when it comes to using a credit card is to make sure that the debt-to-limit ratio is under 30%. Nearly every credit card has a credit limit, so it’s important to keep the balance of the card below 30% of that limit. This is because credit bureaus score consumers lower when the debt ratio goes above 30%. For example, Quincy has a revolving credit account with a limit of $1,000, so in order to be in good standing with the credit bureaus, he keeps his balance below $300.
Credit cards are a great tool that can be maximized for benefits as well. Creditors will offer cards to consumers that get a certain percentage of cashback (usually between 1-5%) for certain purchases such as with particular online retailers. When cards are used in this way AND paid fully back before each credit card statement, people can easily get good deals or some money back with each purchase.
Credit cards should not be maxed out at all times. Credit card interests can be like the boulder that Sisphyus tries to roll up the mountain everyday; it can be increasingly detrimental and impossible to fully pay off the interest. A line of credit, like all things in life, should be used in moderation and paid off as quickly as possible. Most credit cards have an Annual Percentage Rate (APR) anywhere between 13% to 36%. This interest can compound and accrue over time, even to a point where the monthly payment is only paying the interest off instead of the original debt. So it is always best to pay off a card as fast as possible.
The best way to avoid accumulating so much interest and debt is to avoid using the credit card frivolously on things that are unnecessary, such as luxuries you wouldn’t normally be able to afford. Small things here and there are fine like an online streaming service, but only if that service is being paid off quickly and not letting the debt grow. People need to keep in mind that credit cards are not a form of “free money” as debt will usually be much larger than the initial purchase due to interest.
Of course, one of the worst things to do with a credit card is to not pay it off at all. If enough late payments accrue in someone’s account, it will eventually become a charge-off and be sent to a collection agency. Charge-offs are incredibly detrimental to credit history and score, and may prevent customers from getting a proper loan or line of credit in the future.
Having multiple credit cards can be an incredible hassle, especially if those cards have a large amount of debt. If it becomes too hard to manage multiple credit cards, the best way to handle it is to consolidate the cards into fewer or even one single card. A lot of creditors will offer a credit card with no APR for a set amount of time after enrollment, anywhere between 6 to 18 months. These cards also offer a balance transfer benefit or bonus as well. A balance transfer is a great way to consolidate your debt without going through any third party. That way, a single card may be easier to manage compared to multiple cards.
If you have any questions about your own credit card usage or debt, contact Fix Your Credit Consulting at (877) 212-2450 for a free consultation. We are able to help with not only fixing bad credit history but also give advice on how you can increase your credit score and improve your spending habits.
If you have any questions, feel free to give us a call at 877-212-2450!
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