The Real Story Behind Credit Cards
Credit cards can affect credit scores, whether it’s in a negative or positive way. Understanding how credit cards work and the benefits, as well as the negative aspects of them can give you a better outlook on the genuine connection between credit cards and credit scores.
Credit cards in the US
Almost everyone in the US uses credit cards as a way to pay for debt. Dependency on credit has grown immensely throughout the economy, as lenders in the past were more than willing to extend funds to borrowers. Unfortunately, the recession put a damper on that freedom, when credit card companies were sent reeling by their former over-enthusiastic lending. They began using tactics like cutting people’s limits, even if they had more than that limit charged. This automatically put them in a higher interest rate bracket, and many times unjustly cost them over-limit fees. Credit card companies also began charging higher interest rates without notice to consumers, based on their “adjustable rate” clause in the contract. It was unscrupulous acts like this that pressed the Obama administration to face the credit crisis head on, making legislators step in and find ways of regulating credit card company activity.
Understanding credit cards
To understand what impact credit card companies’ actions have on credit, it’s important to understand how credit is scored. A consumer’s credit score is made up of five different components:
- 35% is based on history of payments
- 30% is based on debt percentage, or credit being used versus credit available
- 15% is based on the length of time credit has been open
- 10% is based on new credit taken out
- 10% is based on a mixture of the overall credit a consumer has
Knowing this, the most important thing a consumer can do is pay their bills on time. This is the largest contributor to credit scoring. It’s also important to have a good mixture of all of these elements to maximize a credit score.
Also, length of credit is very important. It’s much more beneficial to have a good payment history with one credit card company than to open new cards that have no history. Consumers should always keep good-standing credit cards open to benefit the most from them.
Debt consolidation companies
Many experts advise against using debt consolidation companies because they do what consumers can do for themselves, for free. A debt consolidation company will charge large fees to negotiate. Experts say that if a consumer wants outside help they should contact the NFCC, the National Foundation for Credit Counsel. They charge a small fee, but it is much less than a debt consolidation firm. The NFCC will communicate with lenders on a consumer’s behalf to work out an affordable plan. They also will work with the consumer to create a workable budget that allows the client to pay down debt as soon as possible.
Debt questions to ask
One important issue to face is what actions led a consumer to having credit card problems. Did overcharging send the credit amount skyrocketing? Did fees due to late payments do the damage? Are credit cards too widespread? These are all questions that need to be addressed for consumers to create healthy relationships with credit. On the other hand, the credit card problems may be due to extenuating circumstances such as unmanageable medical costs. If this is the case, bankruptcy may be a more viable option for the individual. Regardless of what the solution is, it’s important to get to the root of the credit card problem and take care of it. The future after the recession is still unknown and consumers have to work hard to make sure they will be financially sound.