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Credit cards offer convenience and security and are essential in today’s fast-paced world. However, many people misuse their credit cards, resulting in severe financial problems, including debt accumulation and a poor credit score. A credit card can be a valuable tool to fund big purchases, receive rewards on everyday spending, or earn points and miles. The credit card has to suit your needs and goals and, more importantly, be within your income. We will guide you through using your credit card wisely to have a positive impact it has on your credit score.
The significance of a credit card on your credit score
Your credit score is a numerical representation of your creditworthiness and is crucial in determining your eligibility for loans, mortgages, and even employment in some cases. A good credit score can result in lower interest rates, better loan terms, and increased financial opportunities. A poor credit score can limit your financial options and increase the cost of borrowing. The best way to build credit with a credit card is to use the card responsibly. Here are some guidelines for responsible credit card use.
Learn how to read your credit card statement
Understanding what your monthly statement indicates over a specific billing period is essential. Most statements indicate your previous balance, payments, credits, and balance transfers or cash advances. The minimum balance due is the lowest amount accepted as payment and can range from 1% to 5% of your balance due. The payment date is when you have to pay the minimum due. It is vital to know the interest charge or APR – annual percentage rate – on your credit card to see how much interest you pay on certain transactions. Be aware of the credit card fees included and stipulated in your credit card agreement, including costs, rates, and other specified fees in the fine print.
Pay on time, every time
The most important factor is paying your credit card on time, as payment history makes up 35% of your FICO score—the credit scoring model lenders use. A good habit is to pay off your credit card in full each month, as this avoids interest charges and prevents your balance from becoming unmanageable. Set up automatic payments or a reminder to ensure you do not miss a due date. If paying off the credit card balance is impossible, you must seek financial advice and guidance, which indicates that you are living above your means. When you miss a payment, your credit score is affected negatively, and penalty APRs or late fees will be added to your bill.
Pay more than the required minimum
Making the minimum payments on time every billing cycle helps avoid penalties and additional fees, but you continue to carry a balance with interest charged on that balance. It is advisable to pay more than the minimum to reduce the interest. It is the best practice to pay your credit card balance in full each month.
Keep balances low
Spend what you can afford and keep an eye on the balance. Maintaining a low credit card balance relative to your credit limit is crucial. Your credit utilization ratio—how much of your available credit you are using—significantly impacts your credit score. Your credit utilization ratio makes up 30% of your FICO credit score, so it is advisable to keep this rate low—according to experts, it should be below 30%. Calculate your utilization ratio and use the recommended amount.
Budget for essential expenses
You need to create a budget for essential household expenses. You can use the credit card for those expenses and pay it in full at the end of the month. Looking at your spending helps you to cut back if you’re overspending or have to use a credit card to cover additional costs like cable, subscriptions, and expenses that are a “want” rather than a “need.” Spreadsheets and mobile apps are available to help with the budgeting or the old time-tested envelope method. What is vital with any budgeting method is to stick to it regardless of whether you are making money or waiting for a considerable income. Stay within your budget, and do not overspend using your credit card on non-essential items.
Pitfalls and misconceptions
Credit cards lead to debt
If a credit card is misused, it can lead to debt, but it is a powerful tool for financial management and a positive credit score. When used responsibly, having access to credit can help you plan for unplanned expenses in an emergency. Paying off your credit card in full monthly helps avoid interest charges and build a positive credit score.
Closing credit cards improves credit score
Many people think they will have a better credit score if they do not have a credit card. It is a misconception to believe that not having a credit card or canceling yours will improve your credit score rating, as credit scores are calculated based on how well you manage your available credit. Closing a credit card reduces available credit and increases the utilization ratio, potentially lowering your credit score.
Carrying a balance improves credit score
Carrying a balance on your credit card results in higher interest charges and increases the debt-to-income ratio, negatively impacting your credit score. Paying off your balance is the best strategy to improve your credit rating.
Applying for multiple credit cards boosts your score
Having numerous credit cards can increase your total availability to credit, but applying for multiple cards in a short period can result in multiple hard inquiries on your credit report, which can temporarily lower your credit score. It is advisable to wait three to six months if applying for a second card if there are advantages to multiple credit cards.
Disciplined credit card management is essential for achieving long-term financial well-being. Learn how to read your statement, pay bills on time, pay more than the required amount, keep your balance low, and budget for unplanned expenses to keep your credit score and finances healthy.
Bank of South Texas has various credit card options to help you improve your credit score. They have low-rate cards, standard business credit cards, and other options that could benefit you. Call us today to assist you on your financial road to success.