Credit is neither good nor bad by itself. It is a tool that can be used for good or bad purposes. Credit that is used to improve one’s financial well-being or to fulfill essential needs is considered good credit. Credit that is used to pay for consumables or items that have no investment value is considered bad credit.Credit also has different levels of quality based on one’s credit score, which reflects one’s credit risk and dependability as a borrower. However, there is no clear consensus on what constitutes a good or poor credit score, as different lenders and agencies may have different standards and opinions. Generally speaking, a score of 720 or higher is considered excellent credit, a score of 690 to 719 is considered good credit, a score of 630 to 689 is considered fair credit, and a score of 629 or below is considered bad credit. These ranges may vary slightly depending on the scoring model and the country.
The benefits of having good credit include lower interest rates, higher credit limits, better chances of approval, and access to more rewards and perks. The drawbacks of having bad credit include higher interest rates, lower credit limits, difficulty getting approved, and fewer options and benefits. Therefore, it is important to use credit responsibly and wisely, and to monitor and improve your credit score regularly.
How to avoid Credit Cards using for bad purposes?
Using credit for bad purposes means spending money that you don’t have on things that you don’t need or that don’t add value to your life. This can lead to debt, interest charges, and damage to your credit score. To avoid using credit for bad purposes, you can follow some of these tips:
- Create a budget and stick to it: A budget is a plan that helps you track your income and expenses and allocate your money to your needs and goals. By following a budget, you can avoid overspending and live within your means. You can also set aside some money for savings and emergencies.
- Use cash or debit cards for everyday purchases: Cash and debit cards are linked to your bank account, which means you can only spend what you have. This can help you avoid impulse buying and unnecessary debt. You can reserve your credit card for larger or planned purchases that you can pay off in full or in installments.
- Compare prices and shop around: Before you buy something with your credit card, do some research and compare prices and features of different products or services. You may find a better deal or a cheaper alternative elsewhere. You can also look for discounts, coupons, or cashback offers that can save you money.
- Ask yourself if you really need it: Before you swipe your credit card, pause and ask yourself if you really need what you are buying. Is it a necessity or a luxury? Is it worth the cost and the interest? Will it bring you long-term satisfaction or short-term gratification? If you are not sure, wait for a day or two and see if you still want it.
- Pay more than the minimum: If you do carry a balance on your credit card, try to pay more than the minimum amount due each month. This will help you reduce your interest charges and pay off your debt faster. You can also use a balance transfer card or a debt consolidation loan to lower your interest rate and simplify your payments.
Why Credit card companies issue credit cards for free?
Credit card companies issue credit cards for free because they make money from other sources, such as:
- Interest charges: When you carry a balance on your credit card, you have to pay interest on the amount you owe. The interest rate varies depending on your credit score, the type of card, and the market conditions. Credit card companies earn a profit from the interest they charge you.
- Fees: Credit card companies may charge you fees for various services or situations, such as late payment fees, over-limit fees, cash advance fees, foreign transaction fees, balance transfer fees, etc. These fees add to their revenue and also discourage you from misusing your credit card.
- Merchant fees: When you use your credit card to buy something from a merchant, the merchant has to pay a fee to the credit card company for processing the transaction. This fee is usually a percentage of the purchase amount and is shared between the card issuer, the card network, and the merchant’s bank. Credit card companies earn a commission from these fees.
- Other products: Credit card companies may also offer you other products or services that generate income for them, such as insurance, loans, rewards programs, etc. These products may have their own fees or charges that you have to pay if you opt for them.
Credit card companies issue credit cards for free to attract more customers and encourage them to use their cards more often. This way, they can increase their market share and earn more money from the sources mentioned above.
How can avoid paying interest on Credit Cards?
The best way to avoid paying interest charges on your credit card is to pay your balance in full every month before the due date. This way, you can enjoy the interest-free grace period that your credit card offers, which is usually between 20 to 50 days depending on your billing cycle.
If you cannot pay your balance in full, you should at least pay more than the minimum amount due. This will help you reduce your interest charges and pay off your debt faster. You should also avoid making new purchases on your credit card until you clear your existing balance.
Another way to avoid paying interest charges on your credit card is to use a balance transfer card or a low-interest card. A balance transfer card allows you to transfer your existing balance from a high-interest card to a low-interest or zero-interest card for a certain period of time. A low-interest card offers a lower interest rate than the average credit card. However, these cards may have fees or conditions that you need to be aware of before applying for them.
Paying minimum amount of credit is good or bad?
Paying the minimum payment amount on your credit card is better than paying nothing at all, but it is not good for your credit card in the long run. Here are some reasons why:
- You will pay more interest: When you pay only the minimum amount due on your credit card, you are leaving a large balance unpaid. This balance will accrue interest every month until you pay it off. The longer you take to pay off your balance, the more interest you will pay. This will increase your overall cost of borrowing and reduce your savings.
- You will lower your credit score: When you pay only the minimum amount due on your credit card, you are increasing your credit utilization ratio, which is the percentage of your available credit that you are using. A high credit utilization ratio indicates that you are relying too much on credit and may have trouble repaying your debts. This can lower your credit score and affect your ability to get loans or other credit products in the future.
- You will lose your grace period: When you pay your balance in full every month, you can enjoy the interest-free grace period that your credit card offers. However, when you pay only the minimum amount due, you lose this benefit and start paying interest on your purchases from the day you make them. This means that you will pay interest even if you pay off your balance in the next billing cycle.
Therefore, paying the minimum payment amount on your credit card is not good for your credit card. You should try to pay more than the minimum amount due or pay your balance in full every month to avoid paying interest charges, lower your credit utilization ratio, and maintain a good credit score.
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