When times get tough, many people turn to retail therapy to help lift their spirits. With their “buy now, pay later” system, credit cards provide a guiltless form of purchasing power, even when you don’t necessarily have the cash to back that power up. Unfortunately, if you aren’t educated about the ways in which your spending habits affect your credit rating, you could be paying for a lot more than a quick emotional high. As more and more people have used credit cards unwisely, the cards have developed a somewhat bad reputation, but it doesn’t have to be that way.
While credit cards can certainly be used for ill-advised retail therapy, that doesn’t mean they are completely bad. Actually, it’s important to maintain three to five credit cards to improve your credit score. That may sound somewhat crazy, but your credit history plays a big part in determining your credit score. In order to harness the power of credit cards for your own benefit, keep these simple tips in mind:
Never forget the 30/30 rule. Your outstanding debt accounts for 30% of your credit score, and you should never charge more than 30% of your credit limit on your card. If you go above that, your score will drop.
You should also make sure that the credit card companies are reporting your correct credit limits. If for some reason your limits are being reported as lower than they actually are, your 30% is going to look more like 50-60%, which will hurt your score.
Some people falsely believe that keeping a balance on their credit card will improve their credit score. This is a mistake. In reality, the credit bureaus have absolutely no way of knowing what percentage of your bill you are paying. If you are able, pay off your full balance each month, and avoid making unnecessary interest payments. Don’t forget, however, to keep all of your cards active. If you don’t use a card, it will become inactive, and an inactive card will cease to benefit your credit score.
So… credit card debt is a bad thing, but you need to maintain a certain amount on your cards to improve your credit score. The question, then, is this. What exactly should you be spending your money on? How can you use your credit cards to build good credit?
Consider the following statement: Wealth is creating a state of abundance. If you are using a credit card to pay for something, not only are you paying for the item, but you’re also paying extra for the right to “pay later.” So, instead of moving forward financially, you’re actually creating more debt. With this in mind, it’s important to think about exactly what you are using your credit cards for. Buying a shirt or even a tank of gas for your car at an inflated rate doesn’t really make any sense when you factor in interest. However, purchasing a book on finances or taking a course that will teach you a skill you can monetize will be well worth the extra payment you have incurred.
Credit cards should be used to increase your quality of life or your wealth, not simply to put yourself deeper in debt. The next time you’re going to charge something, consider whether or not that purchase is going to create a state of abundance for you. This type of self-control will not only help you improve your credit rating, but it will also help you make better long-term financial decisions.
Learn more about how to fix bad credit and create a high credit score at Phil’s site dedicated to giving the facts about credit scoring and personal finance.
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