Credit card debt is one of the most commonly reported reasons why individuals file for bankruptcy. Credit cards make it easy for users to lose track of how much they spend, causing them to accrue large debt balances. One reason for this is that credit cards can make an individual feel like he or she has more disposable income than he or she actually has. Another reason is that many people harbor misconceptions about credit cards and debt, sometimes misunderstanding critical information until they are taught the truth about credit and debt as part of their required credit counseling for filing for bankruptcy.
A common misconception about credit cards is that carrying a balance on a card increases the user’s credit score. Technically, “carrying a balance” refers to any point in time that the user has unpaid charges on his or her account. Colloquially, the term is used to describe the practice of paying off less than the amount billed each month, thereby “carrying” unpaid charges into the next billing cycle.
Carrying a High Balance to Raise your Credit Score is a Fallacy
Using credit responsibly is what increases an individual’s credit score, not the dollar figure of his or her balance or whether an account consistently has an unpaid balance.
Here is what will raise your credit score:
- Maintaining a credit utilization ratio between 10 and 20% if possible. A credit utilization ratio of 30% or higher, meaning that you owe more than 30% of your total credit limit, will lower your score;
- Making at least the minimum payment on each credit card on time; and
- Using your cards consistently. Closing a card decreases your total credit amount, raising your current credit utilization. Opening a new card can also lower your score by lowering the average age of your accounts. Be strategic about the accounts you open, the accounts you close, and your balance on each.
Paying Off Your Credit Cards Saves You Money
When you pay less than the total amount of your credit card bill, you owe interest on the portion that remains. Consistently paying less than the total amount on your credit card will cause your outstanding debt to snowball and your debt on it to compound, leaving you with a larger bill than the amount you actually charged to the account. By paying your credit cards in full when they are due, you can avoid paying interest on the charges you make.
Work with an Experienced Chicago Bankruptcy Attorney
When your credit card debt becomes insurmountable, bankruptcy is an option that can help you take back control of your finances and work toward a debt-free life. Discuss your case in greater detail and determine whether bankruptcy is the right choice for you during your legal consultation with one of the bankruptcy attorneys at Newland & Newland, LLP. Contact our office to set up your consultation today. We serve clients in the Arlington Heights, Palatine, Rolling Meadows, Libertyville, Mundelein, Buffalo Grove, Schaumburg, Elk Grove, and Itasca areas.