A credit card can be both a good and bad financial tool, depending on how you use it. If you use your card wisely, it can help you build up a good credit score. If you use it foolishly and go on a spending spree, it can severely damage your credit and get you into debt.
Many people suffer because they aren’t aware of the pitfalls of credit cards until they find themselves neck-deep in debt. That’s why it’s important to fully understand how credit cards work before acquiring one, especially if you’re taking out a new card after recovering from previous debt.
Being aware of how credit cards work will help you make more informed financial decisions when it comes to applying for your next card. Here are 3 things that you might not know about how credit cards work.
1. Paying less than the minimum payment hurts your credit score. Paying less than the minimum payment on your credit card statement results in a missed payment. Even if you pay one dollar less than the minimum payment, you will be reported for a fully missed payment. This results in a hit on your credit score. If you frequently pay less than the minimum payment, then you’re likely going through financial trouble and your credit score is being negatively impacted. If you can, always pay either the full amount or at least a little more than the minimum payment required. Doing this will keep interest charges to a minimum and help retire the debt sooner.
2. A high credit limit is not necessarily bad for your credit score. If you believe that a high credit limit is bad for your credit score, then you might be in for a surprise. The fact of the matter is that it’s not always the amount of your credit so much as your credit utilization that makes the real difference. Credit utilization is the ratio of your existing debt to your total credit limit. This means that if your credit cards are always maxed out, your credit score is being negatively impacted. As long as your credit utilization is within 30% of your credit limit, your existing credit does not have any adverse effects on your credit score. In fact, having a high credit limit with a low balance indicates that you are a worthy borrower and this helps increase your credit rating.
3. Having multiple credit cards often translates into a lower credit score: It’s necessary to have at least one credit card to build a credit history, but having a stack of credit cards can actually hurt you, even if you don’t use them. This is because each time you apply for a new credit card it affects your credit score. Furthermore, by having multiple cards it can be harder to keep track of your creditors and payments. The result is often high credit card debts, a large number of missed payments and delinquencies. All of these reflect badly on your credit score.
For many, credit cards are a necessary part of modern life and having at least one can make your life easier. However, you need a solid understanding of how credit cards work in order to build and maintain a good credit score, and keep yourself out of debt. The bottom line is that if you use your credit cards prudently by paying off the full balance each month, then they can be a valuable tool in building your credit history.
Are you struggling with your credit card payments? We can help. The staff at Credit Counselling Services of Atlantic Canada can educate you on using credit wisely. Contact us today for a free consultation.