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Overview
Credit scores can be difficult to understand. While it's easy to gain a poor credit score, it's a lot harder to improve that score one it's down. Many assume that credit cards can help to improve a credit score. The fact is that credit cards can both help and hinder credit scores depending on how they are used.
Credit Cards
It's tempting to think of a credit card as instant money, but this is a dangerous way of thinking. To remain in decent credit standing, you must pay off the entire amount owed each month. Why? Certain cards such as Visa, MasterCard, Discover and Optima work based on "revolving credit."
Essentially, revolving credit means that you can carry a balance on your card, though you will be charged interest each month. With a card such as this, you can pay only a minimum amount each month, but this won't get you any closer to paying off that card.
Improving Credit
If you pay off the entire amount owed each month, your credit score might improve. This can occur if payments are made on time every month. In fact, it is important to keep at least one credit card to improve your credit rating.
People who do not have any kind of credit card may not necessarily be considered a good credit risk. Credit companies want to know that a person is capable of handling credit responsibly. To judge this responsibility, credit cards must be paid in full (and on time) every month.
Dangers of Credit Cards
For those with poor credit, there are some credit cards that can actually improve credit ratings. While these cards are generally high-interest cards, they can reflect positively upon a credit score if they are paid in full at the end of every month.
In this manner, those with bad credit can effectively improve their credit ratings. Still, it is wise to keep all credit cards under control. As soon as a payment is missed (or the amount owed is vast), a credit rating can quickly plunge.
Warning
There's no denying that credit cards are risky. It is easy to become careless when dealing with credit availability. It is never a good idea to spend more money than can be paid off at the end of the month.
In addition, some credit card companies take full advantage of people who miss one or two payments. Read the fine print before acquiring any kind of credit card. Keep in mind that the only way to improve a credit score with a credit card is through timely payments.
There are lots of credit cards out there to choose from. Find the right card with the right terms. If a credit card sounds too good to be true, verify all of the card's terms before signing up.
Checking Your Credit
The first step to building good credit is finding out what is on your credit report. You can order a free credit report once a year from each of the major reporting agencies--Equifax, Transunion and Experian--from the government website Annual Credit Report. Follow the link below to find the most reputable sites for free credit reports.
