How to Put Your Credit Card to Work Building Your Credit

There are a lot of ways you can build your credit and improve your credit score. Loans, when used correctly, can help create a solid credit portfolio. But building your credit on credit cards has a few key advantages. Many of them don’t have an annual fee, meaning they’re free to use, and depending on when you pay off your credit card bill, it’s possible to avoid interest completely. Responsible credit card use can help you build your credit score without impacting you financially in any way. As an added bonus, plenty of credit cards offer points and rewards. You might just get a free flight to Mexico for your troubles!

Before you go out and sign up for a new credit card, it’s important to review your options.  There are thousands of options out there, all with different terms, rates, and perks, and with so many companies competing for your business, it’s important to compare cards so you can make sure you’re getting the right deal. In general, the lower your credit, the harder it will be to get a good rate on a credit card. But as long as you’re making sure to pay your credit card bill before your billing period carries over, you should be able to generally avoid being charged any interest.  

Options

There are a ton of different kinds of credit cards you can choose from depending on your situation. Students can apply for a student card, which are designed for young borrowers who want to establish a credit history. Local banks or credit unions generally offer credit building credit cards to clients who don’t have much credit history, since they already have a personal relationship with you. Many stores also offer their own credit cards, although they tend to have less than favorable terms even though they come with unique perks and rewards. If you find yourself with too little credit history to be approved for any of these cards, you can also build credit by being an authorized user on someone else’s credit card. If a member of your family or your friend has a good line of credit and is comfortable adding you as an authorized user on one of their cards, you can use the card to help establish your own credit history.

Game Plan

Once you acquire a credit card, it’s time to get to work. The goal here is to beat the credit card company at their own game. Credit cards aim to get you spending enough money that you leave a balance on your card that eventually begins to accumulate interest. They make money from the interest on your credit card bill. Typically this is accomplished by setting the minimum required payment per month on the bill quite low so you can feel comfortable that you’re paying off your debt little by little, but in reality, the longer it takes you, the more interest the bank is making off of your back. The trick here is that you don’t need to have an outstanding amount owing on your credit card to build credit, if you make a purchase on your credit card and then pay it off completely before your billing date, you can avoid being charged interest on the card while still building up your credit score.

Applying

The biggest thing credit scorers are looking at is your payment history. About 35% of your credit score is based off whether or not you’re making payments on time, that’s why it’s absolutely crucial to stay on top of paying off your debt. It’s also important to pay off your debt lightning fast in order to avoid any extra interest on your purchases, as we outlined earlier.

The second most important thing a credit bureau is going to look at is your balance vs. your credit limit. This ratio, expressed as a percentage, is calculated by how much you currently owe on your credit card vs. the limit you’re allowed to charge to your card. For example, if your credit limit is $5000 and you have a balance of $900 on your billing date, you have a remaining credit limit of 18%. Typically with this number, the lower the better. People with high credit scores tend to hold their limit at around 9%, which means they keep out a little bit of outstanding debt on their card at all times. This helps improve an overall credit score because it shows to the creditors that you’re actively using a card, but managing payments responsibly. If you’re willing to pay some interest, it is definitely worth keeping a low balance on your credit card to help improve this part of your credit score.

Avoiding Inquiries

Credit inquiries are another metric that determines your credit score, and you’re going to want to keep this one low. A credit inquiry, especially a hard inquiry, can bring down your credit score. Hard inquiries take place when a lender checks your credit score before approving you for a loan or credit card. This means that the more cards and loans you apply for, the lower your credit score will be. Credit inquiries disappear from your credit score after two years, but the basic rule of thumb is that you want to refrain from taking out too many different lines of credit at once if you want to build your credit score.

At the end of the day, the best way to build credit with a credit card is to be cautious with its use and make sure you pay off any balance as soon as possible. Credit cards can be a great way to build your credit score, but if you get carried away you can find yourself swamped with interest payments and potentially a worse credit score than when you started.

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