Guidelines for Revolving Credit Cards

Credit cards are both friend and foe, and to play the game of credit you need to control your credit card spending carefully. The key to getting your credit cards under control is understanding how they impact your overall credit. Since your credit is the basis for lenders, landlords and even employers to make big decisions regarding your life, it's vital to keep your credit cards in order.

Credit Cards

All credit cards are considered revolving credit. The money issued on a credit card is considered a loan from the financial institution. The word "revolving" refers to the fact that the borrower has access to the funds again after the loan has been paid off. For example, if you have a credit card with a $1,000 limit and you charge it to maximum capacity, you still have $1,000 available once you have paid off the balance.

Debt Utilization Ratio

Roughly one third of your credit score is determined by your debt utilization ratio. This is the amount of debt you have in relation to the amount of credit available to you. For instance, if you're carrying a $500 balance on a $1,000 credit card, you're utilizing 50 percent of the credit available to you. The Better Business Bureau recommends keeping balances to 25 percent of your credit limit to keep your credit score as high as possible.

Use

While it's poor financial management to keep high balances on your credit cards, indicating overuse, not using your credit cards at all is also bad for your credit. Use your credit cards wisely and then pay off your balance each time to keep your credit healthy. Use credit cards to protect your big purchases and for online shopping. Under the Fair Credit Billing Act, if the items you purchase are damaged or defective, your creditors will investigate the transaction once you've made a fair attempt to resolve the dispute with the vendor. If the creditor sides with you, no charges are applied to your account.

Payments

The timeliness of your payments is the biggest factor in determining your credit score, making up 35 percent of the calculation. Therefore, it's vital to pay your credit cards on time each month, even if you're only making minimum payments. One payment more than 30 days late may result in a credit score drop of up to 110 points.

Considerations

If you already have a mountain of credit card debt, you must work on paying it down so that your credit score can be as high as possible. Financial experts usually fall into one of two schools of thought when it comes to debt elimination. The first group believes in paying down the cards with the highest interest rates first. Interest is costly, and allowing a balance with high interest to sit means that you're paying money just to keep that balance there. Therefore, paying off the cards with the highest interest first shortens that period and saves money. The second group believes in paying off the card with the lowest balance first, to psych you up about continuing to pay down your debt. By seeing your efforts make a larger impact with the first account, you may become more motivated to pay off the rest of your cards. The method you choose depends on which one fits best with your lifestyle.