A credit card can be a great tool in helping you achieve your financial goals. Wise use of these cards can help you build your credit history and will stand you in good stead when applying for a mortgage. A good credit rating will help you get a better loan interest rate.
With a credit card, you can have ready finances to make huge purchases that go beyond your budget. And if you pay within a given period, you won’t have to pay interest on the cost of the item.
In addition to helping you meet your short-term needs and achieve your long-term goals, credit cards have a variety of reward programs that the holder can benefit from. You can get access to great discounts at selected stores and travel insurance.
But perhaps you’re apprehensive about owning a credit card because of some fears based on stories you’ve heard from previous cardholders. Here are some of those insecurities and the truth behind them.
- Closing Cards Helps Your Score
Having fewer credit cards is wise in terms of managing your debt, but closing old credit cards may not have the effect on your credit score that you think it will. A credit account will still appear on your credit history for up to 10 years after you close it.
Closing a credit card with a nil balance will increase your utilization ratio and lower your credit score in the process. So you should only close a credit card account if you have a good reason to, such as an increase in fees that outweighs the card’s benefits.
And there are benefits to keeping those accounts open. Having a long-term credit account where you have a good repayment history increases your credit age, which will auger well for your credit score.
- Age Affects Your Credit Score
Your FICO credit rating is not affected by your age, contrary to what you may have heard. When applying for a credit card or any other form of facility, your age will be considered, alongside other factors, in determining your ability to repay.
That being said, your credit age is important in determining your credit score. Credit age has less to do with your date of birth than with the period of time and the extent to which you have used credit. If you’ve just repaid your first loan, you are a relative youngster compared to someone who has taken numerous facilities over the years.
Does this mean newbies to the borrowing world are locked out of credit? If you’re wondering how to get a credit card with no credit history, the answer is to look for a starter credit card. Depending on your situation, you can go for a secured credit card, a retail credit card or a student credit card.
- Minimum Payments Should Be Enough
If you think making minimum payments will help you clear your credit card dues, you could be remain in debt for a very long time. The truth of the matter is that you will be servicing the interest on your card, but your balance will remain as it is. You may think you’re saving money, but you’re simply postponing your financial freedom.
The fastest way to clear your credit card balance is to pay above the minimum as much as possible. You can clear your debt in a couple of years depending on how much above the repayment minimum you’re willing to pay.
- Staying Away From Debt Helps Your Score
Put yourself in the shoes of a lender for a moment. Among the people applying for credit, who would you consider riskier, someone who has taken several loans and has a good repayment record or someone who has never borrowed? It is a fact that having a number of credit accounts that you maintain with timely payments increases your credit age.
A higher credit age will impact your credit rating positively, increasing your chances of obtaining credit at a more favorable interest rate. Conversely, you can easily find yourself with a low credit score if you have never borrowed.
Boost Your Score and Be Prudent
A credit card is a great tool to have in helping you meet your obligations or acquire assets you need to make your life easier. However, it can also result in an undesirable burden of debt if not managed well. Before you begin shopping for a credit card, find out how you can boost your credit score and also arm yourself with knowledge on how to best use your card to your advantage.
