Banks, credit unions and credit card companies look at your credit score before they consider giving you credit. Each institution wants to see a high credit score. Your use of revolving credit factors into how your score is calculated. In other words, are you using and paying your credit card charges on a timely basis?
Paying Your Credit Card in Full
Revolving debt, otherwise known as credit cards, affects your credit score more than any other installment debt. For example, you may have a mortgage and pay it on time, but if you have outstanding credit card debt, it will affect your credit score.
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One way to deal with credit card payments is to use the card, then pay it off every month. This will help give you a low credit utilization rate. If you have low credit utilization, that means you are not using all your available credit. You must keep your credit utilization around 30 percent or lower for a decent credit score. But those individuals who are carrying a lower, 4 percent or nonexistent credit utilization, have better credit scores. This is the argument used to justify paying a credit card off in full every month.
By paying off your credit card monthly, you could be showing that you are responsibly handling your debt. But is this the only way to show responsibility?
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If you've accumulated a lot of credit card debt but have maintained a decent credit rating, opening a zero percent credit card may be the route to take.
Improving Credit Score With Credit Card Debt
A credit card debt balance can be used as a beneficial financial strategy. By leaving a balance on your credit card, you show that the card is in use. You probably don't want to show a zero balance on a credit card. It implies that you don't use your credit. A credit card showing activity can help your credit score.
Credit utilization is important, but a credit utilization rate can remain low even if you carry over your balance. By not letting it go above 30 percent and making timely payments, you demonstrate good debt management. To determine your credit utilization rate, divide your total balance by your credit limit and then multiply that number by 100. You want to calculate this across the board with all your cards. The total for all of them is your true utilization rate.
When carrying over a balance, be aware of this calculation. Timely payments combined with a properly managed credit utilization rate will assist you in building your credit rating.
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Credit for Financial Emergencies
A big advantage of carrying a credit card is financing emergencies or other large expenses that you may not be able to purchase with cash on hand. For instance, you'll have credit available if the transmission falls out of your car or you need a new furnace. These are purchases that you may not be able to deal with if you didn't have a credit card. It gives you the option to spread these major expenses out over months.
Making the Minimum Payment
Credit card issuers are in business to make money. Their goal is to make income off the interest rate you pay them. And although making your payments on time helps your credit, it comes at a high price. The longer it takes you to pay off the credit card debt, the more the interest cost racks up.
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Using 0 Percent APR Credit Cards Effectively
If you've accumulated a lot of credit card debt but have maintained a decent credit rating, opening a zero percent credit card may be the route to take. Zero percent credit cards can typically provide up to 21 months interest-free. The interest-free period is the time to significantly lower the accumulated debt from your high-interest cards. You can also make new purchases interest-free.
Zero percent credit card approval is usually dependent on a credit score of 670 or better and may charge for balance transfers. But they are worth considering.
Use Your Credit Cards Responsibly
Credit cards are a necessary weapon in your financial arsenal. Use them only short-term for day-to-day expenses if you must. But the best course of action is to use them for emergencies or large expenses that you can pay off over time.