Managing Credit Cards
In today’s world, credit cards make life flow smoothly and are a vital part of the way we both spend and manage our money. If you want to see a movie, one quick swipe of plastic opens the door. In fact, credit cards are a necessary tool to establish, and even build credit. If you apply for a mortgage, or a car loan, your credit card history will go a long way toward getting you approved. However, managing credit cards can be much more complex than people think. Each credit card is a separate debt. How you manage these debts can dramatically affect your credit score, and determine your ability to be approved for a home or car.
The ease of using a credit card can be a double-edged sword. If not carefully managed, credit cards can negatively affect your goal of building credit. If you don’t keep track of purchases, it’s incredibly easy to charge more than you anticipated and end up with a larger than intended balance.
It’s important to understand the effect balances and payments have on your credit score to help you make effective credit card management decisions. Each card likely has a different credit limit and interest rate. Consider the following tips to help manage your credit cards effectively and how to build credit with a credit card.
Tip #1: Payments
The first rule to understand about credit cards is how payments work. When you make a payment on-time, you raise your credit score and you are building credit. Late payments reduce your score. It is very important to make your credit card payments on time.
Tip #2: Utilization Ratio
The next rule to understand is the ratio of credit card balance to the maximum balance. The credit rating companies compare the maximum available balance to the current balance. For example, if you have a card with a maximum balance of $2,500.00 and your balance is $1,000.00; the utilization rate is 40%. Basically, the lower the utilization rate, the higher your credit score. Your utilization ratio can be reduced when you lower your balance. The important take-away is to remember, on-time payments and a low utilization ratio will ensure a higher credit score and help with building credit.
Tip #3: Card Age
Believe it or not, the age of your credit cards are an important factor if they have been used consistently. Older cards with current payments and a low utilization ratio reflect stability and consistency to the credit rating companies. If you are constantly taking out new credit cards, the agencies can see this as evidence of financial trouble.