Your credit score, which decides how much money you can borrow, is determined by your past history of repaying loans and hence your trustworthiness. A credit score is a three-digit number calculated from your credit report (a record of your past borrowing and repaying) that indicates how likely you are to repay your debts. It’s a simple way for lenders to determine whether to give you a credit card or a loan without having to sift through the full credit report. Overspending on your credit card can actually lower your credit score. Therefore, try to keep credit card spending to less than 30% of your credit available. At the same time, never taking out a loan or never using a credit card means you won’t ever develop a credit score.
Credit cards are a great way for you to increase your credit and lending power over time. But watch out! There are many hidden traps in some credit card operations that can hurt your personal finances and impede your long-term goals. For example, far too many consumers fall into the trap of thinking they will be okay if they stay under their credit card limit; however, your credit score can be harmed if you incur a “high credit card utilization ratio”, or if you are spending close to your limit.
In addition, when many consumers receive their credit bill, they believe that they only have to pay a small amount of what they owe. While minimum payments are a great tool if you need to pay less once in a while, consistently relying on them will bury you in debt and additional interest. This can result in a greater loss than if you had just paid your bill in full, and you will no longer be deemed a low-risk borrower. Also, make sure to understand all the terms for your credit card, especially the fees that are charged. Most credit cards will include late payment fees, balance transfer fees, and overbalance fees that can surprise you. Many rewards cards will also incur an “annual fee” that is unavoidable. Do your research to see if the card and rewards are worth the fees.
You also have to be aware that every year your credit card issuer is required to send you a privacy statement for your account. It might be surprising to see that these institutions often share your name and address with other companies for advertising purposes. Usually, you can contact your agency and opt out of information sharing to reduce the amount of companies they send your information to, if this concerns you.
You should never forget that using a credit card is a form of “borrowing”, and you are expected to pay back the expenses for your purchases at the end of the month; otherwise, you will be charged some pretty high interest rates. When a financial institution gives you a credit card, they set a “spending limit” based on your credit score. A higher credit score means you will have a higher limit, while a lower credit score means you will have a lower limit. While you can spend as much as you want up until the limit and not have to pay interest if you pay it back on time, you should not do this since it will lower your credit score! Borrowing large amounts of money almost always lowers your score, even if you pay it all back at the end of the month.
A higher credit score means you are more likely to repay your debts, so a financial institution would trust someone with a higher score more than someone with a lower score. Using a credit card responsibly will make your credit score go up. Meanwhile, not using one at all might mean you never even have a credit score! While accruing consumer debt is not good, this does not mean you should not use credit cards. As long as the balance (amount borrowed) is paid in full at the end of each month, credit cards are a convenient tool and some even offer other benefits such as frequent flyer miles!