Spinning the Revolving Credit Wheel

Credit cards can be an invaluable tool in handling day-to-day life. When used wisely, they can help with cash flow, refine budgeting and spending habits, add security and convenience to transactions, and steadily build your buying power. Unfortunately, knowing how to manage credit card debt is not a skill in which we are born.

Gaining financial literacy takes time and practice. We often think of credit cards in terms of a monthly bill that always seems due. Yet, in reality, they’re long-range indicators of how we handle money — our own and others’ as well. When we use them, we prove we can be trusted to repay what we’ve borrowed and that is the key to increasing your credit score.

What Credit Reporting Agencies Want to See

When credit reporting agencies assess an individual’s creditworthiness, they evaluate key factors and use them to calculate a credit score that determines what level of borrowing you can be trusted with. Those factors include:

• Payment History. Your record for paying credit card, loan, mortgage and other credit-based bills on time can account for more than a third of your score. Consistently making solid payments on time raises your score. Any delinquencies like missed or late payments are viewed as risks and can lower a score.
• Credit Utilization Ratio. When credit card companies issue you an account, they set a credit limit for that account. That figure represents the upper limit of how much money they are willing to let you borrow at a time. Then, they watch to see how much of that amount you use and calculate a balance-to-limit ratio. Ideally, they like you to keep that ratio below 30 percent. When the ratio creeps or remains higher than 30 percent, they refer to that as high utilization or even overextension, which can lower a credit score.
• Length of Credit History. Building credit is a financial relationship, and the reporting agencies like to see longevity. A longer credit history is generally viewed positively because it provides more data. Agencies also consider the average age of all credit accounts as well as the oldest and newest accounts. Older accounts with a good history indicate stability and responsible credit management.
• Types of Credit in Use. A diverse mix of credit types demonstrates the ability to manage different kinds of credit. Having both revolving credit and installment loans, for example credit cards and car loans, positively impacts your score.
• New Credit and Credit Inquiries. Each time you apply for credit, the lender makes a hard inquiry. It’s just an accepted cost of doing business. Too many inquiries or new accounts in a short period, however, can negatively impact your score.

Leveraging the Revolving Debt of Credit Cards

A large part of learning how to use credit cards responsibly is recognizing that they are revolving debt and understanding how revolving debt works. Credit cards are the most common form of revolving debt, but personal lines of credit and home equity lines of credit are also frequently used forms of revolving credit.

Revolving credit is usually issued as an account that makes money available to you up to a certain limit. You can use none of it, all of it or, ideally, an amount in between. You are then billed on a monthly cycle for whatever amount you have borrowed from the lender. The bill will usually display an itemized list of expenditures as well as a balance total and a minimum payment figure.

• Paying Your Balances in Full: If you’re able to pay the full balance each month, you’ll owe nothing in terms of interest. If you can pay only a portion of what you’ve borrowed, the balance that remains will carry over to the next month but will accrue interest at whatever rate the lender has assigned to your account. Interest rates on revolving debt accounts are typically variable, tracking with the market.
• Supplement Your Spending with Credit: The convenience of revolving debt is that the account allows you to use what you need repeatedly. As long as you make monthly payments on time and remain within your credit limit, you can continue to borrow, and the issuer will keep the account active and in line with the current market. An additional feature that makes credit cards in particular attractive is that they are typically unsecured revolving debt — meaning they require no collateral to use.

The opposite of revolving credit is an installment loan. Mortgages and car loans are common installment loans. You borrow a set amount of money with a specific repayment plan in place detailing how much each monthly payment will be and a set term for repayment. With revolving debt, since you can borrow repeatedly, there is no set end date.

How to Increase Your Credit Score by Managing Credit Card Debt Responsibly

Building credit is essentially building financial muscle — you cannot build it unless you use it, but you have to use it correctly. If you overlay what the credit reporting bureaus value with the traits of a revolving credit card account, you can see how responsible repeated usage can be an asset.

• Using the card regularly allows you to establish a payment history that demonstrates repeated timely, regular payments.
• Keeping balances under 30 percent of your available credit limit demonstrates control and a just-right credit utilization ratio.
• Opening, using and keeping an account builds account longevity.
• Having an active credit card in good standing accounts for the revolving credit portion of account diversity.
• Maintaining good credit sets a foundation for ready approval of new credit when you need it.

You don’t need a lot of cards — just a good one that fits your lifestyle and offers you features that you’ll want to use. You also don’t need to overspend to be able to use your card. Use it for the monthly expenses you’d have to spend on anyway. You can incorporate your card as part of your monthly budget and use your monthly statements to track your spending.

Grow Your Buying Power with La Capitol

If you’re ready to start building your buying power with a credit card, or if you’d like to expand your existing accounts with a new workhorse card, check out La Capitol’s selection of Visa credit cards.

From our Cash Back Visa Signature card and Prime Plus Visa to our Rewards Visa, you can take advantage of low zero or 1.99% introductory promotional rates for a year while reaping the rewards of borrowing wisely.