A credit card helps you to borrow money from your issuer. You can acquire a credit card from a bank, credit union, or mobile wallet. Usually, the cards allow you to borrow money in a revolving manner in that, once you pay your current debt, you can borrow money again. The more you continue borrowing and paying on time, the more your borrowing limit increases. But is it bad to have a lot of credit cards with zero balance?
Before I proceed, you need to understand what a credit balance is. A credit card balance refers to the amount of money you owe your credit company in financial language. I.e., the amount you are supposed to pay your card issuer per given time. Usually, you have to clear your balance every month and then borrow again.
A credit card balance increases as you use your card for various transactions. You can utilize your card to buy goods or fund transactions of various online payment services such as Venmo, Cash App, Zelle, etc. You can also use a credit card to withdraw money from an ATM point. However, financial experts do not encourage using a credit card to withdraw money since the process attracts a lot of fees.
How to get a credit card?
You can acquire a credit card from a card issuer. Banks and credit unions are the main issuers of payment cards. In most cases, you have to apply for the cards online and get them at your physical location. Alternatively, you can apply for one at a physical location. The issuers usually send the card to a physical location, whereby you must activate it to enjoy the services.
There are two main credit cards that you can get today. We have the secured and the unsecured ones. Mostly, secured credit cards are for building credit. Numerous financial institutions issue secured credit cards for rebuilding credit. With such a card, you get a chance to grow your scores from scratch or a bad score point.
Sometimes you may find yourself with bad scores because maybe you defaulted payments of a particular loan due to lack of finances. In such a case, you can settle with the debtor and then get a secured credit card to rectify your creditworthiness. After attaining the proper scoring, you can then get an unsecured credit card.
The cards usually check your credit scores to decide your borrowing limit. The better your scores, the higher your borrowing limit and vice versa. Again, cards for good scores usually charge low-interest rates per given time.
How do unsecured and secured credit cards differ?
The primary difference between secured and unsecured credit cards is how you acquire them. You must part with a security deposit for secured credit cards before getting one. Financial companies require you to pay the money before getting your card. For unsecured ones, your scores talk louder. If you have been paying your loans well in the past, you will likely get a good-excellent unsecured credit card.
Another difference between the two cards is how they function. Secured ones give you a limit based on the security deposit in your account. The higher your security deposit, the higher your limit, and vice versa. The secured credit cards give you a limit based on the credit scores: the more your scores, the more your limit and vice versa. Again, the unsecured credit cards for good credit charge lower interest rates since there are lower risks involved.
Is it bad to have a lot of credit cards with zero balance?
A credit card with zero balance means the owner does not owe any money to the issuer. That means maybe you have repaid your debt in full or haven’t used your card in any way. However, having a zero credit balance can negatively affect your credit scores. Remember that credit card issuers usually use your card usage activities when calculating your scores. Therefore, if you keep your card dormant, that will lower your general scoring.
How do I grow my credit scores?
You can grow your credit scores using either a credit builder loan or a secured credit card. When applying for the credit builder loan, you deposit some amount in your account to act as security. You then borrow against the deposit and repay the loan as per the agreements. With time, your scores grow, and you can then qualify for unsecured loans and lines of credit. Your security deposit becomes available in your account for various uses.
You must open a checking account with the institution of your choice before getting the credit builder loan. It can be a bank or a credit union. On the other hand, you can use a secured credit card to build your credit. The card works the same as a credit builder loan since you have to deposit money to act as security then borrow against it. For a secured credit card, you can get approved for a credit card with no credit since your deposit will act as security.
The amount you deposit dictates your card limit. Your issuer then reports your card usage to the credit bureaus. After gaining substantial scores, your deposit is available in your account for use. The more you utilize your card, the more you grow your credit scores.
How are credit scores calculated?
Credit bureaus do credit score calculations as they have the mandate from the government to calculate scores and compile reports about borrowers. We have three main credit bureaus: Equifax, Experian, and TransUnion. Financial companies usually report to these bureaus, which utilize the information to develop scores and reports.
When a financial company wants to lend you money, they usually make a hard inquiry from the bureaus to determine your ability to repay loans. Credit bureaus calculate your scores using the following information. You can see the percentage that each of them contributes.
i) Payment history (35%)
How you are paying your creditors contributes a lot to your overall scoring. If you have been paying late, you are likely to have low credit scores. The worst is if you default on some loans. On the other hand, if you have been paying early in advance, you will likely have a high count on your scores.
ii) The amount owed (30%)
The amount owed means the amount you have to repay to your creditor. You should avoid spending too much of your credit limit. It is always advisable to spend at most 35% of your limit. Sometimes it is better to get a credit card with a higher limit than spending too much of your available limit.
You can even transfer your balance from a low-limit card to a high-limit one and enjoy it. The best balance transfer credit cards for fair credit have 0% intro APR for a given time to allow you to repay your current debt with ease.
Remember that this does not apply to a situation where you have many credit cards. That is beneficial when you spend little amounts on every card.
iii) Length of credit history (15%)
You have around 15% of your scores if you have a long borrowing history. Financial companies trust someone who has been taking loans for a long time. You cannot compare someone who has been using loans for over 20 years with someone who has used loans for one year only. However, if you have a long history and have been repaying your debts badly, then your long history will not be of any help.
iv) New credit (10%)
New loan applications mean new hard inquiries, which negatively impact your overall scores. You must ask yourself if getting a particular card or loan is worth losing several scores. It is good to minimize the number of new credits you apply for.
v) Credit mix (10%)
Mixing your credit means getting various kinds of loans. You can get auto pans, mortgage loans, home equities, student loans, personal loans, credit cards, and so on to use within a given time. When you mix credit, you can increase your scores considerably.
Which tricks do I use to improve my credit scores?
There are various tricks to improve your credit scores to qualify for loans with higher limits. They include the following.
- Pay all your debts on time. That shows that you are responsible enough to honor your pledges.
- Dispute any wrong credit report. If you think that someone else used your identity to get a loan, you should dispute to have the details rectified.
- Become one of the authorized users of someone else’s credit card. You can get someone with good scores and become one of the users of their credit cards.
- Lower your credit card utilization ratio to at most 35%.
- Avoid unnecessarily applying for credit.
Bottom line
A credit card helps one to borrow money from their issuer. We have secured and unsecured credit cards. Secured means you deposit some money to act as security and borrow against it. Unsecured credit cards are the ones that do not require a security deposit. Your scores dictate your borrowing limit. There are several ways to raise scores, including clearing your debts on time, disputing any wrong information in your report, etc.
