Even if you are not in debt, think twice before taking scissors to the plastic.
Credit cards are one of the most misunderstood forms of building a healthy credit history. Often assumed to be – and used as – a source of emergency income, credit card misuse is a common occurrence.
However, digging into what credit is, how it works and where credit cards come to play within the larger picture can help those little pieces of plastic work for you, instead of undoing your financial stability.
Understanding The Function Of Credit
Credit cards are much more than a way to purchase something when your pocketbooks are looking thin. In fact, when the bank account shows a low balance, turning to credit cards could be a red flag of poor financial habits and money mismanagement.
When used responsibly, however, credit cards are one of the easiest and most effective ways to build credit.
Particularly in this day and age, having a robust credit history is a must. While some can do without, and some preach the credit card free life, extensive, healthy credit can expand the limits of your purchases and even employment options.
Having credit is all but essential for making large purchases such as cars and homes. Furthermore, credit is also necessary for long-term contracts like renting or employment. Regarding employment, while it is advised against for employers to deny someone a position based solely on credit, it is not illegal.
Even if the purchaser was able to pay for these expenses without having a line of credit, if a cash or check purchase is not a current option, the purchase could be denied. Despite proof that income and cash flow exceed the cost of the purchase, a lack of credit history can be grounds to not sell or extend employment.
Why? Because credit scores indicate to the seller or employer that the purchaser has a history of being financially responsible.
How Credit Cards Build, Or Burn, Credit
Holding a credit card is not a free pass to free money. It’s opening a line of credit.
When understood for what it is and maintaining the attitude that the card is your ticket to building a record of responsibility, mishandling can be easily avoidable.
The simplest way to keep credit card use in check is to never spend more on the card than you could in cash, followed closely by the next important step of paying off the balance quickly.
When credit card use is seen as an alternative to cash you already have — just a different form of payment — crippling, debt-forming habits can be sidestepped.
That being said, debt happens. Mismanagement happens. Emergencies arise where payments using a credit card are the only way to stay afloat. Don’t go rushing to cancel all cards if this happens. Don’t forget that the poison can be the remedy with proper guidance. The same thing that got you into trouble, when used correctly, can redeem your credit.
Ways To Boost Your Score
- Use the card(s) frequently
- Don’t exceed 30 percent of your maximum credit amount
- Make payments regularly
- Make full payments
- Consider the advantage of multiple credit cards
Creditors, lenders and people extending contracts all look at credit reports to get a clearer picture of who you are. They are all searching for specific indicators of responsible money management.
By demonstrating financial responsibility, you convey a well-rounded persona — marking yourself as someone who can be trusted with significant responsibilities over a long period of time.
One key indicator of your credit report is how frequently you use your line(s) of credit. Simply holding an account does not demonstrate to creditors your spending habits; use of the card(s) is essential. Extremely sporadic use does little good to keep those reports in ideal shape.
Frequent use, coupled with regular payments, shows that you know how credit functions and are not using it to purchase things outside of your budget.
Infrequent use, even if the balance is paid in full after a brief time, does not show the same level of responsibility. A single instance or two does not indicate a reliable habit — the habit is what people are looking for when they access your credit report.
The 30 Percent Guideline
Similarly to frequent use, the amount of credit used sends a clear message over time about spending habits.
In order to boost your credit most significantly, financial advisors suggest implementing a 30 percent rule, where the credit holder does not use more than 30 percent of their available credit.
Again, over months, this habit begins to form a pattern that in turn forms a picture of “typical use.” The longer your typical use remains constant and demonstrates responsible credit, the better your credit report will look to others.
Staying below your credit limit — significantly below — reinforces that the card is a vehicle of financing and not a way to squeeze in a few more purchases that are unaffordable within your budget.
Regular, Full Payments
Think of making payments as a way to check in with your credit company.
Not only do credit cards come with set due dates that are highly encouraged — and often reinforced with late fees, but on-time payments display awareness on your part of deadlines, basic contractual agreements and following through on promises.
Yet again, by repetitively doing the same thing over a length of time, you create a paper trail of habits that lenders, creditors and contractors love to see.
Furthermore, even a single late payment can put a dent into your credit score. In order to avoid this damage, make a habit of paying at least the minimum amount every month.
In order to have the best score you can, do not carry a balance from month to month to month, only ever paying the minimum required. Pay off the balance as quickly as possible. This strategy should not be difficult if you do not use your credit card to finance things you cannot really afford.
One Card, Two Cards, Many Or Few Cards
Having more than one line of credit can be beneficial — if used correctly. However, multiplying your cards multiplies the responsibility.
Holding multiple cards and paying on them regularly demonstrates the ability to manage multiple lines of credit without drowning in one debt by compensating through another. Having more than one card and handling each of them equally well can further bolster your image as a responsible adult. Above all, when someone accesses your credit report, they are looking to see if you can demonstrate responsibility.
Demonstrate that you have the capability of managing debt without being controlled by it.
Again, by properly handling multiple lines of credit at once, frequently keeping minimal balances and paying off monthly, more than one card can be advantageous to your credit score, and thus your relationship with creditors, lenders and contractors.
The Bottom Line
Credit cards are tools that build your reputation as a financially responsible adult. With the right intentions and proper use, they can build and rebuild security. Used otherwise, they can spell financial trouble.
Holding multiple lines of credit can be beneficial if you act proactively and ensure to pay off the balances on a monthly basis and do not max out the credit limit; staying at or below 30 percent has been shown to send the clearest message to lenders that you are financially responsible and accountable for your spending habits.
However, multiple lines of credit may carry too high of a risk if they are used as “free cash” to finance items your bank account cannot handle, which can lead to large debt problems and a murky credit history. To avoid falling into the frequent trap of using plastic in a pinch, change your mindset to view credit cards as an extension of check and debit cards, and only spend what your bank account can handle.
With proper control, holding credit can be an unparalleled financial benefit.
As with any contract or financial decision, think before you sign. Understand what you are getting yourself into by opening additional lines of credit or holding lines of credit that are not helping to build your security. Don’t be caught unprepared. Take control of your financial health today.