Wednesday, December 30, 2009

Why do so many people have bad credit histories?

A good way to understand why so many people have a bad credit history is to examine the use of credit cards. There are two ways to use a credit card. One is as a convenience. Those who use credit cards solely for convenience tend to not want to carry a lot of cash and find writing checks to be a nuisance. They pay for their purchases with their credit card and each month pay their credit card bill in full.

If this describes you, you have made the credit card a useful tool. You may even get extra benefits, such as cash back or airline miles. However, in the credit card industry, you are called a deadbeat. Using a credit card to your benefit is not what the credit card company had in mind when it issued the card. Some credit card companies will charge you a fee for not making installment payments (paying interest). Even though the credit card company charges a fee to the seller of your purchases, the big money is made on interest paid by the credit card holder. Furthermore, while you have made your credit cards a valuable tool, you are not developing a credit history, as the loan companies mainly look at how you handle making regular payments on a balance so they can determine how you will handle making a thirty-year mortgage payment.

The second way to use a credit card is to pay less than the total monthly bill, thereby costing you an interest payment. You are borrowing money every time you use your credit card, and what that costs you depends on how you use the card. While paying this interest is certainly costing you money, it is giving you a credit history you can later use to borrow greater sums of money, such as what you will need to buy a house. All of this depends on your ability to properly manage your credit cards and your payments.

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