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Depending on how high your balances are in relation to your credit limit, you may also run the risk of damaging your credit score. Carrying a balance does affect your credit score.
Credit utilization , or the amount of available credit you have used, is an important factor in your credit score. Second only to payment history , it counts for about 30 percent of your total FICO score.
Your credit utilization ratio is 50 percent. This is going to be bad for your credit score. Keep in mind that this is the total amount you should spend in one billing cycle on this card. Chances are you have at least one more credit card, so we have to take that into account as well. This puts you between the 25 percent and 30 percent utilization ratio on this card.
This is important because while each card will be counted separately, they will also be combined to come up with a total. Overall in this example, the utilization rate is At 30 percent utilization, you will effectively maintain the status quo on your credit score. Moving down to 25 percent could result in an increase in your score. The lower you can go, the better it will be for your score, assuming all of the other factors that go into your score are in good shape.
So how low are we talking here? Those who enjoy the best credit scores typically have utilization factors in the single digits. But remember that they are also doing all of the other things right—they are paying their bills on time, watching their utilization, not closing old accounts to maintain their credit history, have a good mix of both revolving and installment accounts and only open new accounts as needed.
Paying your balances in full every month demonstrates that you are living fully within your means. In other words, you are not using credit cards to extend your income, but as a way to spend the income you already have. This is the best sign of overall financial health. Some high credit score achievers may carry a small balance think single percentage points in order to demonstrate that they are using the credit they have been given.
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It's also easier to miss a payment deadline when you have more cards than you can manage. Remember, a few late fees or interest payments will quickly obliterate those sign-up gifts or rewards. You can use your cards more frequently once you have your debt paid off and know how to avoid new debt.
As long as you pay your balance in full and on time each month, there is nothing wrong with using credit cards instead of carrying cash or to take advantage of rewards like cash back or frequent flier miles. Just make sure those purchases fit within your monthly budget.
Credit card companies employ tactics like sending checks in the mail, encouraging you to use them to pay bills or to treat yourself to something nice, but they rarely make it clear that these checks are treated just like cash advances.
Taking a cash advance is dangerous because you start to accrue interest immediately, unlike regular credit card purchases. To add insult to injury, the credit card company may not consider the cash advance to be paid off until you've zeroed out the balance for your other purchases. The best thing to do with these checks is to shred them as soon as you receive them, avoiding the temptation while preventing would-be identity thieves from snagging account numbers out of the trash.
Many companies also send a personal identification number PIN shortly after you sign up for a card, hoping you'll use it to get cash from an ATM. Shred that paper, too. Medical bills can be overwhelmingly expensive, especially if you're uninsured.
If you're having trouble paying your medical bills, negotiate an agreement with the hospital or other company to whom you owe money. Don't add to your bills and stress by adding exorbitant credit card interest rates onto them. You should also go through your medical bills a second or third time, making sure they are accurate and you understand all the charges. Some folks get so stressed out or embarrassed by credit card debt they stop opening their bills and pretend there's no problem.
It's obviously a bad approach because, while you're ignoring the bills, the ticking time bomb of interest rates is adding to the debt. In addition, if you miss a payment or two, the interest rate may shoot higher under the terms of the card agreement.
You can call card companies if you feel overwhelmed and ask to renegotiate the terms of your agreement. You may be able to get the interest rate lowered, set up a payment plan, or get some of your debt forgiven.
If your first call doesn't work, keep calling back because a different customer service representative may allow you to negotiate a better deal. Ignoring debt can also lower your credit score and spur debt collectors into action.
With unsavory tactics often employed in this industry , you don't want to do anything that puts you on their radar. Finally, don't let embarrassment prevent you from taking action. You may assume that everyone else has their finances under control, but many other consumers face similar debt problems.
The mistakes listed above are some of among those most frequently made by consumers. But there are others. Don't make late payments. Doing so will damage your credit score and will also incur late payment charges on your account. Your credit cards will likely have a regular due date every month—say, the 15th of each month—and it rarely deviates.
So it's important to know when your bill is due. If you have trouble remembering when your payment is due, try adding a reminder on your phone or computer, or circling the dates on a calendar that's easily accessible. If you don't have the money to make payments, you shouldn't be using the credit card—and you shouldn't be maxing it out. Remember, credit cards also charge over-limit fees , so if you fall behind on your payments, the interest will kick you over your limit and you'll have to pay more in fees.
Banks and credit cards supply the terms and conditions of specific cards at the time the application is completed and when the card is issued. It's important to know what these terms and conditions are before you use the card. Doing so will help you have a better handle on what's expected of you from the credit card issuer, and it will also help you manage your spending habits better. Cleaning up credit card debt takes time and self-control, but the steps outlined here aren't difficult to follow.
Credit cards become helpful and convenient financial tools once you overcome debt and learn to use them sensibly and responsibly.
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