You can use your credit card for more than just buying things
Check Your Credit Score
The type of credit cards you can apply for depends on your credit score. Therefore, before you start applying for credit cards, it’s helpful to know what your credit score is so you can apply for the appropriate cards.
Understand the Components of Credit
Your credit score is made up of several elements, each affecting your score in different ways. According to FICO, here’s what goes into your credit score:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit: 10%
- Credit Mix: 10%
Consider Getting a Secured Credit Card
If you have bad credit (or no credit), one option is to get a secured credit card. These cards are available to almost everyone, but there are conditions. You must make a refundable deposit to open the account, and this deposit typically becomes your credit limit.
Avoid Getting Too Many Credit Cards
It can be tempting to sign up for many credit cards, especially with the rewards and special offers for financing purchases in stores. While there are no simple rules about how many cards are too many, there comes a point when managing multiple accounts becomes more difficult than it’s worth. If a new credit card would tempt you to spend more than you can afford, or if you have trouble remembering to make payments on the new card alongside all your other cards, don’t open it. These issues will negatively impact your credit score instead of helping it. Moreover, every time you open a new credit card, it will be listed as an inquiry on your credit report, which can affect your score for up to a year.
Always Make Payments on Time
The biggest factor affecting your credit score is whether you make payments on time. A single late payment can have a significant impact on your credit score. Worse yet, the mark will stay on your credit report for seven years, although the negative effect will fade over time. The good news is that you can completely avoid late payments by committing to pay those bills on time, every time. You can set up automatic payment on your credit card account for at least the minimum due each month.
Keep Balances Low or Ideally Zero
The second biggest factor affecting your credit score is how much debt you have, especially regarding your available credit. This figure is known as credit utilization, and it’s simply a measure of the total balances of your credit cards compared to your total available credit. For example, let’s say you have two credit cards, each with a limit of $5,000. If you have a balance of $1,500 on one card and $3,500 on the other, your credit utilization ratio is 50% because the total balance is $5,000 and the total limit is $10,000. Most credit experts recommend keeping your credit utilization ratio below 30%. The lower the percentage, the better, and ideally, you want to pay off your balances in full and owe no debt on your credit cards. You can do this by only buying what you can pay back each month. You can also make several smaller payments each month to keep your spending in check and avoid any large unexpected bills at the end of the month. This will boost your credit score, and you won’t owe any interest if you pay off your balance in full each month.
Keep
Keep Your Old Credit Cards Open
The length of your credit history is a relatively minor factor in determining your credit score, but it is important nonetheless. To calculate this factor, credit scoring models will take the average age of all your accounts into consideration. This means that by keeping your old credit cards open, you can maintain a long credit history that will boost your credit score. If you close those old credit cards, your credit history will be shortened, and your score may drop as a result. Of course, there are other times when closing an old credit card is warranted. If it charges a high annual fee and you no longer use it, you should definitely close it. And if that old card tempts you to fall back into some bad spending habits, you should absolutely close it.
Maintain an Emergency Fund
People often fall into credit card debt because life’s surprises come up, and it’s easier to just put emergency costs on a credit card and pay them off later. But for many people, “later” doesn’t actually happen, as emergencies keep coming up, and new expenses join old ones on the credit card. This usage leads to an increased balance on your credit card, which makes your credit utilization ratio worse, which in turn lowers your credit score.
The best way to break this cycle is to maintain a separate emergency fund. This way, you can use your credit card to cover emergency costs if you want to (especially if you’ll earn rewards from it), but you can also pay off the charges immediately and avoid the cycle of debt.
You Can Use Credit Cards to Build Credit
Using credit cards to build credit is a double-edged sword. If you use them wisely, you can enhance your credit score and open doors that were previously closed to you. But if you’re not good at managing your credit cards, it could further damage your credit score. It is important to be honest with yourself about whether you can use credit cards responsibly, so you can stay on the right path toward a better credit score.
Source: https://www.thebalancemoney.com/credit-card-build-credit-2385756
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