First, you need to know that credit cards have no effect on your credit score. Credit cards only affect your credit score if the card is issued by a company reporting to one of the major credit bureaus: Equifax, TransUnion or Expirian. While most banks report to all three, a few secured credit cards companies don’t. It is crucial to determine if the issuing bank reports to credit bureaus if you want to rebuild your credit using a secured credit credit card.
Credit History
You establish a track record by adding credit card issuer reports to your credit file. This track record is used by lending institutions to determine how much you can pay back debt. This is a simple concept: If you have ever paid off your debts, chances are that you can pay them back in the future. Although this is a straightforward definition, there are many aspects to the picture. It is easy to see how this works. The credit bureaus are like your teacher. Your credit score is like a report card and your credit history your grade. Credit cards can have a significant impact on your credit score. Here’s how it works.
Credit cards and credit to debt ratios
Let’s suppose you have two credit card accounts with a $10,000 limit each. Let’s suppose that you have a balance of $5,000 per month on one of your credit cards. Your debt to credit ratio with two credit cards is $20,000/$5,000 [total available credit/total debt]. This would mean that 25% of your total credit available would be used. This is a great place to be. If you were to close just one credit card, this would make your ratio $10,000/$5,000. This would lower your credit score as you would have used 50% of your credit available.
Credit cards are a great way to increase your credit score.
A person could improve their credit score by simply getting another credit card, as described in the previous paragraph. Yes. If you have a credit card limit of $5000 with a constant balance of $2500, your debt-to-available credit ratio is $5,000/$2,500. This means you are using 50% of your total credit. However, if you get a second credit card limit of $5,000 with a balance balance of $500, your debt-to available credit ratio will be $10,000/$3,000. This would mean that you would use 30% of your credit available and your credit score will improve.
Why are some considered risky
The lending institution will consider you to be using your entire credit limit. This means that you could fall into the category of people who are overextending themselves. History shows that people who have over extended themselves are more likely to default on their debts. The above statement is accurate, but there are other factors. For example, if you have too much credit card debt you may be considered to be at high risk if your income isn’t sufficient to cover your credit limit. If you don’t have credit cards, you aren’t establishing credit history.
Be careful, this could cause you to be hurt
Many credit card issuers offer a grace period to cardholders. You will not be charged any percentage rate or APR if you pay your bill in full every month. You can avoid finance charges if you have a credit card that has a credit limit up to $5,000. However, if you pay your bill in full each month, you could endanger your credit score. Credit card issuers only report on your credit report how much you owe. They don’t report the fact that you pay all of your monthly balances in full every month. It looks on paper that you have an unpaid balance of $1,500 every month and you don’t pay it off. You might switch between cards every few month to show a balance of zero. This will improve your credit score. If you’re looking to purchase a house, you should pay off your credit card balance several months ahead of time so you have a good credit to available credit ratio. This could help you save thousands on your mortgage payments.
