Many people have learned that building unmanageable credit card debt is one of the quickest ways to drive you into unforeseen financial hardship, for overspending is the cause of most economic turmoil. What most people don’t understand is how maintaining open credit cards are able to help you build credit, obtain loans, and even generate income.
Let’s take a look at how a credit card will help you build credit, for this is a simple though in the whole process. Many young students will research student credit cards, and obtain an entry-level credit card designed for people with little to no income. This is a great way to build your credibility, for at some point in your near future you will need a loan. What I will suggest to you is if you are stuck in a rut where your credit score is now progressing in the right direction, and you are continuously paying off your debt; you may want to look to into local credit unions. Local credit unions will often provide credit cards with higher limits, so that an individual’s debt-to-income ratio is higher. This will help increase the overall credit score, and provide more options later in life. The reason credit unions are able to do this is because they are not publically traded, so all of their profits go back to their account holders. As they accrue income, they provide their profits to their account holders in forms of higher dividends and higher credit limits. Either way the individual will benefit more from obtaining a credit card from a local credit union than a commercial bank.
Now the next topic shouldn’t be too much of a surprise, as it is well understood that the higher the credit score the more opportunities one will have with obtaining a loan, for it goes hand in hand. What is most important about understanding credit cards in obtaining a loan is that it is important to keep credit cards open, and active. The longer the credit line has been open the more credibility is established for a person, and with a longer history of active credit usage a lender is more likely to offer you an opportunity for a loan. An easy way to draw this comparison would be to utilize an individual’s track record, and if their work experience states that they have a history of growth in a specific field; it is realistic to provide them with more responsibilities. The same can be stated for obtaining a loan based off of credit growth. The higher the debt limit the more likely the chance of being given an even larger loan that will help subsidize any current debt you have on your account. This helps in lowering the debt ratio, and it shows that you are able to manage your credit limit. In the long run this helps create a higher credit score.
Here is where all of this comes together, and where it gets really interesting. Proper credit card management aligned with fundamental money management can help you generate income from your credit card. Let me explain. Say things have been going well with your credit score, and you are looking to apply for a new card. You need something that will provide you with a cash rewards, because you want to create some room for any instances life will throw your way. In addition, you have been able to manage your budget to the point where you are no longer in a whole, and have saved some money to cover any overages that happen along the way. What you want to do here is sign up for a cash rewards credit card that pays you anywhere from 1% to 5% back on all of your purchases year after year. The most effective way to manage this process, so that you are able to generate an income is to use this credit card as your bank card. For example, if you typically spend $1,000 a month on groceries, entertainment, and utilities, such as a cell phone, put them on your credit card. Pay these expenses before the statement closing date, so you do not accrue interest expenses. To provide you with an example of how this can add money to your pocket without accruing any more debt take a look at this scenario – $1,000 a month x 1 year (12 months) = $12,000. Now if you have a cash rewards credit card that pays you 2% back per year on all purchases you have made $240 on purchases that you would have made during the year, and if you pay off the purchases before the end of the month, you will not accrue any interest expenses. Managed properly, the credit card company could owe you money, and you will have zero debt. One of the many ways you are able to make your money work for you.
Remember, credit cards are designed to help you establish long term credibility to banks, and designed to make you a client for a long period of time. It does not help a company to lose out on clients year after year, so introducing this financial management into your lifestyle is simply one way that you can get the most out of your paycheck.