If you've found yourself reading this post then I'm assuming that either you're having problems with credit cards or you don't have much experience with them and are looking for a few pointers. I would first like to point out that credit cards are an amazing tool to build your credit. Essentially, credit cards are pieces of plastic that offer a one month floating loan. Many credit cards also offer amazing incentives such as cash back or frequent flyer miles. If you are using your debit card instead of a credit card you are doing yourself great disservice.
You First Card
Your first credit card, especially if you are younger, will probably have a very low credit line and won't have very many incentives, if any. That's all right... use it as a coffee card... or a gas card. Don't worry as the months go by you will build up your credit score and begin receiving offers for newer and better cards. Above all make sure you only spend what you can pay off and make sure you pay more than the minimum every month. Believe it or not paying more than the minimum but not paying your bill in full is better for you credit score. The reason for this is, not paying your card in full each month is one way theses companies make their money. I am in no way implying that you should intentionally pay interest on a credit card balance just for a small bump in credit score. I am merely pointing out that if you can't pay off the entire balance but pay more than the minimum don't worry it won't lower your score.
The Evil Credit Card Companies
It's true, credit card companies want you to spend money and they want you to stay in debit. The perfect customer, in the eyes of a credit card company, is someone with a steady job that loves to spend. Lets see how much money a credit card company would make if someone spent like a maniac and built up their credit card debit to... oh lets say $10,000.00 at 18%APR (annual percentage rate). Then lets say this person finally came to his or her senses and decided it was time to tighten that belt and pay it off but was only able to afford a $300.00 monthly payment. How much money would this person have lost in interest payments? It would take 47 months to pay off that debit and $3967.00 of the money paid would have gone towards interest, the key, ladies and gentlemen is proper debt consolidations. In short, be careful not to foolishly use your card or you could be wasting a lot of money lining the pockets of these over feed fat cats.
Your Credit Score
One of the ways that your credit score is calculated is age of credit history. Basically, this means the amount of time you have had credit. If you have a credit card that is 5 years old and then get a new credit card account it will lower that average age your credit history. This is why I recommend building up your credit history with multiple cards when you are young. The new credit card wouldn't have lowered the average age of your credit history as much if you had 5 cards which were 5 years old. Some other factors in calculating your credit score are payment history, inquiries to your credit score and your outstanding debit.
Your payment history is very important, always pay more than the minimum. Payments to credit accounts show up on your credit score three ways... no payment, minimum payment and more than the minimum. So if you owe $500.00 and the minimum payment is $20.00, pay $21.00. The total amount paid will not be reflected and this will show up as "paid more than the minimum" on your credit score for that month. This makes you look good and will make getting important loans easier later on.
Inquiries to you credit score are usually made when you apply for some sort of credit account... a new credit card, car loan, line of credit... etc.. Certain employers sometimes also run credit checks on new potential highers. This will only affect your score negatively if there are several inquiries made in a short amount of time. So don't go applying for ten credit cards in the same month.
Finally, your outstanding debit is calculated by your debit to credit ratio. What is your debit to credit ratio? This is the percentage of your total credit that is in use. If this ratio goes over 25% it could possibly lower your credit score. Lets say you have a total credit line of $10,000.00 (a total of all your credit accounts) you should never owe more than 2,500.00 at any given time. This only applies to credit loans (credit cards) not installment loans (car loans, mortgages).
Final Thoughts
As I said before, credit cards are very useful tools and can help build your credit and credit score while offering some very worthwhile incentives. They can make it much easier to get other forms of credit such as car loans or mortgages when you need them. Remember credit cards aren't free money and you will have to pay off whatever you spend at the end of each month. Use your credit wisely and avoid a headache later on in life.
Blog ya later,
Kegnum
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