Credit cards are useful financial tools that can prove indispensable to consumers navigating their way through the modern economy. Not only do cards free individuals from the need to carry large sums of cash when making a large purchase, they also make it possible to purchase, use and enjoy items not yet fully paid for. Unfortunately, it is possible to use credit cards in ways that can cause long-lasting damage to an individual’s financial prospects.
New card users sometimes do not realize that many facets of their spending behavior are being tracked, so that future lenders can evaluate their capacity to pay back borrowed money on time. Financial institutions considering doing business with you will be able to see how many cards you have, how much money you owe on each card, and how many times in the past few years you have skipped payments or submitted them late. Using such information, lenders will decide to accept or decline your application for any kind of loan in the future. This applies to probably the most important loan that anyone ever applies for, namely a mortgage.
Using credit cards wisely
A first step to responsible and informed credit card use is to choose the right card. Consumers may believe that a low interest rate is the only important consideration, but other factors must also be taken into account. A high annual fee may drain more money from a consumer’s pocket, for example, than will a free card with a slightly higher monthly interest rate.
Another vital element to consider is the grace period allowed by the card. Some credit cards begin charging interest from the day a purchase is made. Others do not charge interest until almost a full billing cycle has elapsed. This latter situation gives the consumer a chance to pay off purchases before interest begins to accumulate. In the long run, an adequate grace period can represent significant savings for a consumer.
Using credit cards while staying out of debt
Modest fees and a low interest rate can make a card more affordable, but responsible card users also understand that they must be careful to keep their purchases within reasonable limits. It can be quite tempting for new cardholders to go on a spending spree, buying items that seem within their reach for the first time. Such charges may not be sustainable, however, particularly if the consumer overspends month after month.
Cardholders can avoid overspending if they follow two simple rules. The first is to never charge more in a month than you can pay off using money from your bank account. The second is to have the discipline to pay off each credit card obligation in full each month. These rules assure that a revolving balance will not accumulate.
Those individuals that are more comfortable maintaining a card balance may not wish to pay off the amount owing in full each month, but they should be aware that revolving balances accrue interest even on cards with generous grace periods. Over time, the cost of an item may be doubled or even trebled if consumers take a long time to pay it off. Often cards are structured such that the minimum payment due will keep debt active for many years. This is not to a consumer’s advantage. Wise credit card users will always pay as much as they can each month in order to retire debt quickly. The “minimum payment” amount should be regarded as a last resort.
Managing credit cards and credit history
Many consumers are surprised to learn that having too many cards is considered a negative factor by lenders since several cards can mean that a consumer has the potential to accumulate a great deal of debt quickly. Financial institutions evaluate loan applicants based largely on the ratio of their income to total potential debt load. Being able to use credit excessively will make an applicant’s income appear too low in comparison to possible future debt. This will cause some lenders to offer such “risky” applicants a higher interest rate. Other lenders may simply refuse to issue a mortgage at all.
Consumers should, therefore, shed credit cards that they do not need; one or two cards are sufficient for most people. Another important element to managing credit cards and your credit history is to cancel unwanted cards properly. When a lender sees only that a card has been cancelled, the presumption may be that the card company had reason to distance itself from a given customer. Consumers should therefore avoid cancelling cards over the phone, as this usually produces no useful paper trail. Instead, cancel cards in writing and save copies of all correspondence so that you can demonstrate in future that it was your decision, not the card company’s, to end the business relationship.
Credit cards offer consumers convenience, but they also help them to demonstrate their creditworthiness so that mortgages and other essential loans are more likely to be available to them in the future. In order to secure this second advantage, however, consumers must use credit cards with the care that all important financial transactions deserve.