UNDERSTANDING HOW CREDIT CARDS WORK AGAINST YOU

Understanding How Credit Cards Work Against You

To first review how credit cards can negatively affect your life is to understand why paying off credit card balances should be a priority. When you are late paying your credit card bills or miss payments entirely, you are setting the stage for a vicious cycle to begin. Interest rates on your cards will likely rise, so you will need to come up with even more money for a final pay off. If you are already experiencing money issues that cause you to make late payments, the extra interest charges can greatly hinder the repayment process.

Zero Balance is Important

When you are able to successfully navigate your debt issues and have achieved zero balances on your credit cards, it is time to plan ahead for the short-term future as well as for your long-term financial stability.

Zeroing out your credit cards is a good thing to achieve and many credit card holders may be tempted to close down their accounts and do away with plastic completely. While each person’s situation is different, keep in mind there are plenty of useful miles, gifts and cash back rewards that you can reap from using credit cards.

In order for consumers to have a solid credit rating on a consistent basis, there needs to be a mix of credit accounts maintained. Accounts that will strengthen your credit rating include your mortgage loan, personal loans, auto loans, and credit cards. Each account you maintain will need to be paid on time each month to keep your credit score satisfactory. By keeping your credit card accounts open and using them responsibly, you can re-strengthen your credit rating after dealing with debt problems.

Since your credit rating is partly based on the length of time your accounts have been opened, closing your account can shorten your credit history, which causes a drop in your credit score. Even if you feel you have no need to get a loan or have another credit card for the rest of your life, you will be doing yourself a disservice.

Your Credit Score, Beyond Loans and Credit Cards

Credit scores are not just used to qualify for a loan or credit card. There are many industries that now rely on a person’s credit history report to make decisions. The auto insurance industry is one; lower credit scores translate to higher instances of claims. Their theory is that low credit score holders are a bigger risk and as a result, they are charged more in premiums for coverage.

Landlords are another group that will likely ask for a credit check before you are approved for a rental place. You may think you don’t need good credit because you never plan to buy a home, but it can become quite difficult to find an apartment or a house with a limited or poor credit score.

Finally, you need to consider your employment opportunities. More and more employers are requiring credit checks on candidates before hiring is considered. Specifically, those working for the government or finance sector should count on having their credit checked.

If you are thinking about closing an account with a zero balance, consider how long you’ve had the card and how it can affect your overall credit score. Sometimes credit card companies will close a cardholder’s account if there is no activity for a certain amount of time. In order to keep this from happening, it may be a good idea to link your card to a monthly subscription, like your cable or Netflix bill.