Credit cards were designed for convenience. It made it easier for consumers to pay for things as they didn't have to just use cash. But they're also easy to mismanage.
The average American credit card holder has 3.7 cards lining their purse or wallet, according to a recent Gallup survey. That can make it difficult for some people to keep up with their bills, which can lead to major financial problems and a lower credit score down the road.
Luckily, consumers can call on a few of the tips listed below in order to sidestep some potential financial pitfalls.
Understanding a credit score?
Prior to building or maintaining an excellent credit score, it is crucial to comprehend what exactly goes into figuring a consumer's credit score.
Most lenders use the FICO score, according to The Motley Fool. A consumer can check their FICO score - for a monthly fee - at myfico.com. A FICO credit score tells lenders how responsible a borrower is.
"Excessive credit card debt should be seen as a warning sign that a person is in the financial danger zone," said Gail Cunningham, spokesperson for the National Foundation of Credit Counseling. Cunningham added that such actions appear "likely to negatively impact a person's credit report and potentially result in a lower credit score."
Late payments tend to stick on a FICO report for around seven years, so it's always a good idea to remember to pay bills on time. FICO also stated that recent credit history carries additional weight ‡ compared to items in the distant past.
Making the minimum payments
One tricky aspect for many consumers is deciding how much of their credit card bill they should pay off each month. It might seem that making the minimum payment will make it easy to get by each month, but interest will start building up.
The Jacksonville Business Journal recommends credit card users that are strapped for cash to do everything in their power to avoid only paying‡ the minimum. The Business Journal said an extra $20 to $40 per month can make a big difference in lowering the principal balance on the card, limiting the amount of interest needed to be paid off.
Paying the minimum might also make a consumer less worthy in the eyes of a financial institution. A person doling out the bare minimum each month is often viewed as a financial risk, limiting their chances to acquire a mortgage or loan later in life. Payments should also be made promptly, because payment history makes up 35 percent of your credit score, according to the Business Journal.
Avoid maxing out and canceling old credit cards
Closing out a credit card might seem like a bright idea for some consumers when they are no longer using a particular card or have signed up for a new one. However, it's generally not considered a good move in financial circles.
Closing out an old credit card can hurt your credit score by raising your credit utilization ratio. The ratio compares the total used credit to total available credit, which impacts scores and helps lenders determine if a borrower is safe or risky for a loan.
For example, if a person's credit card debt is $500 and their total available credit is $1500, they have a credit utilization rate of 33 percent. The higher the number, the worse the credit score.
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