Your credit card plays an incredibly important role in your credit score, which in turn impacts your interest rates and eligibility for loans (and more).
Below, we break down how you can use your credit card for the good of your credit score.
Pay On Time
Why is this important? Your credit score (specifically your FICO® score) is made up of five key factors:
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
As you can see, payment history makes up the largest part of your score. Missing a payment is the factor that negatively impacts your credit score the most.
Keeping a history of on-time payments is key when it comes to keeping your score high and getting approved for future loans. If you can't pay the full amount, then make sure you make the minimum payment.
While you will still have a late payment reported on your credit report, you usually have a grace period around 21 days before you are charged interest.
Pay Twice Monthly & Set Up Autopay
Worried about missing your due date? Pay your bill twice a month to avoid late payments and keep a low balance.
You should also put your accounts on autopay so you don't have to worry about missing any payments.
Pay In Full
Pay in full whenever you can -- you don't want to get into the habit of spending more than you can repay. While a minimum payment can help you avoid getting your credit dinged by a late or missed payment, it doesn't do anything to keep your credit in good standing or save you on interest.
Watch Your Credit Utilization
Your credit utilization is the next most important factor in your credit score -- making up 30% of it.
Credit utilization shows how much of your available credit you use. It's calculated by dividing what you owe by the credit limit (either on one card or the total for all of them).
Your credit utilization ratio is determined with the balances you have when your card issuer reports to the credit bureau. You can contact your issuer and have the date changed if it makes it easier to make your payments before your balances are reported.
Maxing out your credit card may not seem like such a bad thing, but it shows lenders that you are not responsible with paying back borrowed funds.
Knowing this, your goal should be to reduce what you owe and increase your available credit. Ideally, you should keep your credit utilization below 30% and if you can keep it under 10%, that's even better!
If you're worried about overspending on your credit card, then you may want to treat it as though it were a debit card by paying off purchases as soon as you make it.
Another important note: Make sure you balance your card use. If you have a high utilization rate on one card but not on the others, your credit will still take a hit. Instead of charging a high balance on one card, use up to 20% of the limit on one card and then move onto another. You can even set up alerts on your cards to notify you when you've reached a certain amount of credit utilization.
Ask your card issuers to increase your credit limit so you have more available credit. The only downside of this is that you may be hit with a hard inquiry, which temporarily damages your credit. However, the benefits far outweigh this.
Use Your Card And Make Purchases
Have a credit card is not enough -- you also need to make purchases (even if they are small) so creditors can see that you are responsible at borrowing money AND paying it back.
Don’t Close Too Many Cards
If you don't use one or more of your credit cards, you may be tempted to close it. However, unless you have cards that carry annual fees, you should keep your credit accounts open -- even if you don't use it -- since having these accounts open increases your available credit, lowers your credit utilization, and benefits your score.
If you're worried about using that available credit, you can leave the accounts open but cut up any cards that you are tempted to use. You can still use these to make small online purchases so they don't get cancelled due to inactivity.
Keep Your Cards Active
Credit cards can be canceled due to inactivity, so keep track of the last date you used each card. Use them at least once every year for a small purchase and pay off the full balance.
Keeping these accounts open lengthens your credit history and makes your behavior with finances more predictable to lenders. (Remember, the length of your credit history counts for 15% of your FICO® score.)
Pick The Right Card
There are multiple cards you can choose from but make sure you do your research before applying and pick one based on your needs. You may even want to get another card to help with your credit utilization.
Two excellent options for cards would be a secured credit card or a starter credit card.
A secured credit card is a great way to build your credit. It works similarly to a regular credit card but is secured by collateral -- a refundable security deposit -- in the case that you default on your payments. While it may come with high fees, it can help improve your credit as long as you are making on-time payments.
A starter credit card -- such as a student credit card -- usually has low limits but it can help you learn how to manage credit responsibly and build your credit.
You can also find a card that is specifically designed for individuals with bad to fair credit and make consistent payments to build your credit and qualify for better options in the future.
Just be sure not to apply for too many cards, as these too many inquiries made in a short period of time can damage your credit temporarily and signal to lenders that you are in some kind of financial trouble.
Become An Authorized User
Ask a trusted family member or friend if you can become an authorized user on their credit card, which can help you build credit faster.
This is especially useful if you are too young to get a credit card (specifically, if you are under 18) or you aren't able to qualify for a card.
As an authorized user, you will receive a card connected to your family member's or friend's account. You will be able to use it to make purchases but unless you have their express permission, you should probably avoid doing this, as the account holder is the one responsible for making payments.
As long as you are responsible, you can build credit by having that good behavior reported to the bureaus.
Monitor Your Credit
Track your progress and credit score with a credit monitoring service, which can also alert you to fraud and suspicious activity.
Need more information on how to build your credit? You can find more information here.
Can I use a credit card to improve my credit?
Absolutely. As long as your issuing bank reports your activity to the three major credit bureaus (Experian, Equifax, and TransUnion) and you are paying on-time and in full, and you are keeping your credit utilization low, your credit score will benefit.
Can I receive any benefits with a credit card if I have good credit?
Yes! Some perks you can receive include:
- Rewards programs
- Fraud protection
- Auto rental insurance
- Hotel stays
- Discounts on airfare
- Travel expenses
- Interest-free periods
- Cash-back on purchases
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