Whether you know it or not, your credit score is directly impacted by your credit cards. How you use them determines the outcome of your credit history, be it positive or negative. Maybe you are not thinking about it now, because it’s not that important to you and your life at this exact moment. But it would be best if you thought about the future. That’s because you can build up a credit history using your credit card, which opens you up to more significant financial opportunities in the future.
It means that if you use your credit card wisely, you will have more benefits from it in the future.
If you don’t understand a word that we are talking about, but you are interested in learning a bit more, because you want to invest in your future, keep reading. We are going to go through some basic yet essential things you need to know when it comes to this topic.
How Do Credit Cards Impact Your Credit?
It is essential to know that credit cards create various effects on one’s credit, even at the point of approval. To understand the process of this occurrence, we will break it down in detail. Each time a credit card is being applied for, an inquiry is always recorded on your credit report. It impacts your record in both ways.
One of the outcomes is that there will be a dip in your credit score within the range of five to 10 points for the following year. Even after your inquiries have been logged onto your report, creditors can still view them for up to two years. In a situation where there are loads of inquiries on your credit card, even if you are approved or not, there would be assumptions about you being in dire need of cash.
Also, due to these credit card inquiries being recent, there may be doubts about the status of your credit card since it takes time for one’s accounts and charges to reflect on the credit report.
How Does Credit Utilization Influence Your Score?
What does credit card utilization mean? It refers to the ratio of your credit limit that is being charged on your credit cards. It is vital to focus on this aspect as it makes up 30% of your FICO score. One detrimental issue of always owing on your credit cards is that it reduces your score. The more an individual gets closer to his or her credit limits, the more such a person is being considered to be financially reckless. And most lenders will flag this person as someone more likely to have a hard time repaying that money. And you don’t want to be flagged as that person, because from that everything else can be difficult.
While people who charge small amounts are the ones that are likely to be able to pay off their balance in full every single month, and these kind of people are the ones that don’t get flagged, and the lender sees them as a lower risk.
As you spend, observe your limits on each credit card. It will help you maintain your account correctly. Whatever purchase you make can be spread across multiple cards; that way, you do not strain your account. Being mindful of your spending habits can set your credit in the right direction and improve your credit score.
What Amount Should Be Left On Your Credit Card?
Knowing how credit card utilization works, we will discuss how you can maintain your credit cards. One general rule to observe is that your credit balance should be below 30% of your total spending limits.
What this means is that if your credit card has a spending limit of $10,000, then 30% of that is $3,000. It implies that your balance should be consistently less than $3,000. Maybe there will be a time when you will have to spend a little bit more money, and that is okay if it is necessary. But you should avoid spending enormous amounts of money on unnecessary things every single month because it will reflect wrong on your credit score. It would be best if you thought like an adult and behave responsibly. If you develop a habit of wise spending, you will be thankful in the future.
Another essential factor to note is that credit bureaus keep tabs on your principal balance, even if it is paid off immediately. Hence, precautionary measures should be taken when spending in a single statement period. Creditors can view the amount you charge one-time, regardless of the type of payment made. If you would like to get more assistance on maintaining your credit cards, please visit this link: CreditRepairCompanies.com.
How can you lower your credit card utilization?
Here are some essential tips that you can do to lower your credit card utilization, and a credit repair company can give you the best advice on how to apply these tips.
- You should make more credit card payments in one month. It is done because that way, the balance never gets too high. Because the issuer of the credit card reports your activity to the credit bureaus once a month, you should pay a portion or everything before that day if you want your credit utilization to be lower.
- Use multiple cards and spread charges across every one of them. If you have more than one card, then you will have more accounts with low credit utilization compared with just one with a high one.
If you are still a bit unsure of what to do, you should use the services of a credit repair company, because they will undoubtedly know how to solve your problem.