How do credit cards work

Whether you are purchasing laptops, TVs, gas grills or lattes, it is more than likely that you are using your credits cards to do so. But, how much about your credit cards do you really know?

Do You Know How to Use Your Credit Cards Effectively?/b>

Most people know how credit cards work and that they can reproduce rather quickly. People usually begin by opening up one credit card account and before they know it, they have a wallet full of them. The way you use your credit cards can affect your credit rating in different ways. First, if you actively use your cards but at the end of each month are not paying your bills on time, this will have a negative effect on your credit score and credit rating. When you own your own credit card, you need to be responsible with your actions including your spending and paying off the balances. A simple way to pull your credit score way down is to miss your payments. In fact, sticking to at least 20% below your credit limit is how you get the best credit points.

How Credit Cards Affect Your Credit Score

Many people believe that only missing a single payment will not harm their credit score. Actually, it can have a big effect on your score. According to the author of Your Credit Score, Liz Pulliam Weston, by missing just a single payment, your score can actually drop over 100 points. A good way to ensure timely payments is to set up automatic billing. Being a savvy and smart consumer ensures that your credit cards are working for you rather than against you. After all, the higher your credit score is, the better.

Another popular belief is that closing your credit card accounts can help your credit score. This all depends. When you close a credit card account, you increase your overall utilization rate. This results in your credit scores decreasing. Your utilization rate is also known as your balance-to-limit ratio. You can measure it by adding up your credit card balances and your credit limits. Then you divide your credit card balances by the total limits. Each time you close an account, it results in your total balances becoming a higher percentage of your total limits, and this appears as a risk. Typically, the lower you get your utilization rate, the better off you are. It is best to keep your credit accounts open if you plan on making a big credit purchase over the next three to six months and you do not have the best credit scores.

Keeping a Healthy Credit Score Using Credit Card

1. Continue to check your credit score to stay on top of your credit rating. Credit report errors do happen and will damage your score if you let them sit on your reports. Check your credit reports at least once a year to stay updated all the time.

2. Pay your bills on time, all the time. Again, missing even one payment can affect your credit score negatively. The good news though, if you make your payments every month on time, you can actually boost your credit score.

3. Although being active with your credit cards is good-if you are making timely payments-use them sparingly. Even if you are able to buy items easily without using money, this does not mean you cannot make purchases without your credit cards either. A good rule is if you have the money to spend, use it. This will allow you to keep your credit bills low and practice being responsible financially.

Credit cards can work for you or against you. If you use them responsibly and pay the principals each month on time, it should have a positive effect on your credit score. However, if you have a handful of cards, max them all out and only pay the interest, this will decrease your score tremendously. Always preview your credit reports to see how your credit cards are working for you and take the necessary steps to keep your credit rating in good standing.

Kedy is an active finance blogger who is fond of sharing interesting finance management tips to encourage people to manage their personal finances. More specifically, she advocates that people should check credit reports and scores regularly.

One Thought on “How do credit cards work

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