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 are not aware of the pitfalls of credit cards until they find themselves neck deep in debt. That’s why it’s important that you understand how credit cards really work before acquiring one, and especially when opening new credit accounts after you’ve recovered from previous debts.
Here are 3 things that you might not know about how credit cards work. Being aware of these facts will help you make more informed financial decisions when it comes to applying for your next card:
- Paying less than the total minimum payment hurts your credit score: The total minimum payment is the amount that you must pay each month if you don’t want the company to report the difference as a missed payment. Each missed payment costs you money in the form of interest. Paying less than the total minimum payment frequently means that you may be going through financial trouble and consequently hurts your credit score. If you can, always pay either the full amount or at least a little more than the minimum amount required. Doing this will keep interest charges to a minimum and help retire the debt sooner.
- 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. 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.
- More credit cards often translate into lower credit score: It is often 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 do not use them. This is because each time you apply for a new credit card it affects your credit score. Also, with multiple cards, it can be hard 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 must have a pretty good idea 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 to build 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 more information.