Credit Cards and Your Credit Score
by Ellise Walsh

Credit cards can be beneficial, especially when you need to make a hotel room reservation or reserve a card. They can be helpful to hand on hand in case of emergency, but they can also be addictive and dangerous. Prior to the Twenties, most consumers did not even have any knowledge of the principle of buying products on credit unless they had a charge account at a local store or place of business. Since the first charge cards were put into practice and subsequently evolved into the credit cards we know, love and test today an increasing number of consumers are finding themselves mired down in credit card debt. Most consumers have in excess of one credit card and the balances carried on those multiple credit cards can be astounding. What usually starts out as one credit card, just to have for emergencies, often spirals into multiple credit cards with high balances that often results in damaged credit scores. Once this addictive pattern of behavior has begun it can be increasingly difficult to control and especially to stop altogether. Most consumers are unable to find a way out of the avalanche of debt that is created with credit cards. The truly sad part is that the debt load seems to keep increasing, no matter what strategies the consumer attempts to employ in order to get out of debt.

Let’s take a look at a few strategies that don’t work when it comes to trying to pay off credit card debt.

Just making the monthly minimum payment. Most credit card companies base the amount of money you are required to pay every month on a complicated formula involving the average daily balance, plus any additional charges, minus any payments, averaged out over the month and then multiplied by the monthly interest rate, which will usually vary depending on what category the charge falls into. Even the formula is hard to follow! Attempting to employ it in a manner to get out of debt is next to near impossible! Needless to say merely making the monthly minimum payment required on credit cards will not get a consumer out of debt, especially if they continue to make charges to the account.

Transferring balances in order to obtain lower interest rates. This strategy rarely works for the low introductory fees advertised by credit card companies are merely marketing devises used to get the consumer’s business. The rates are only introductory and are therefore very temporary in nature; good only for a specific specified time frame. After that the rate will normally rise. If the consumer has several different types of charges on the account; for example if there is a balance transfer, a cash advance and a regular charge then there may very well be three different interest rates to deal with. Typically cash advances come with much higher interest rates than regular charges. The truly sad part about this frenzied practice of transferring balances is that many times after the initial introductory period is over the interest rate on the new card will be higher than the rate on the old card. This means that instead of saving money, the consumer is actually spending money. Not only that, but all of this money switching can negatively impact a consumer’s credit score and make it difficult for them to qualify for future loans.

So, what is the best method for paying off your credit cards in order to raise your credit score?

First, realize that paying all your balances down to zero will not necessarily raise your credit score. The amount of debt you hold does not contribute solely to your credit score. That number is made up by a variety of factors including whether or not your payments are made on time and in some cases can be assisted by the consumer carrying a moderate balance on credit and charge cards. Having access to a significant amount of credit, especially spread out over several cards that is not accessed regularly, is considered to be a risk by lending institutions. Lenders are concerned that consumers who have access to this much credit may experience an emergency or other situation that would encourage them to use all the credit at once. Lenders would much rather see a consumer who carries a moderate balance of no more than 75% of the amount of credit available and makes consistent and timely payments.



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