No matter how you look at it, a good credit score is integral to your life here. You’ll need it for loans, mortgage, insurance, employment, and much more.
But to get a good credit score, you’ll need a credit card. There’s a very small percentage of Americans who don’t use credit cards. If you’re one of those people, we get it. After all, no one likes dealing with debt.
Taking on credit cards when you don’t need one can seem foolish. Particularly when over 68 million Americans have bad credit and another 25 percent have a credit score that’s less than 599. But, it’s necessary. So, what’s the solution?
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Choose the Perfect Card
Accirding to JD Power, many Americans credit card holders are carrying the wrong credit cards. By that, we mean cards that either has excessively high interest or repayment fees. Also, this could mean cards they don’t need.
Credit cards are just like loans in the sense that you only should get the ones you need. It would be a poor choice to get a personal loan with no credit check when all you need is a quick cash loan.
Of course, many of these credit cards often come with an impressive number of rewards. Which is probably why many users can’t just seem to pay off their credit cards.
When people choose credit cards, they usually do so according to their biases, and the appeal of associated benefits. Unfortunately, they also tend to underestimate the associated fees and hidden charges that come with these cards.
For instance, they overestimate their ability to pay off the credit card balance in full. As a result, they forget to pay attention to the card’s interest rates.
Or some people only see the high volume of rewards, and mistakenly underestimate the real annual fees. The point is anyone can be blindsided by all these.
Which is why you need to do the math and ensure that the card you’re applying for is the best one for your financial situation. You can do something as simple as switching to cards with lower rates and fewer perks.
This way, you’ll end up saving hundreds of dollars every year in fees and interest. Of course, if you have bad or fair credit, you can be sure that your credit card interest rates and fees will be higher.
Develop a Credit Mentality
The entire American financial system runs on credit. And your credit score will determine if you’ll enjoy certain benefits. The good news is you can take out credit cards for the sole purpose of building your credit.
You just need to know how to use the system to favor you. If you’re worried about being in debt, don’t. All you have to do is develop a credit mentality that used correctly, will give you those perks.
And if you have bad credit, now’s the time to fix that. Just so you know, lenders think people with bad credit are higher risk clients. They also think those with higher credit scores are low-risk clients.
These low-risk clients often have a history of being financially responsible. Have this at the back of your mind.
When you finally decide, choose cards that work for you. If this is your first credit card, don’t get it because of the bonuses or rewards. These are traps that often have hidden fees, higher interest rates and charges.
Don’t take up travel cards just because you think you want free air miles. When you can pick up regular reward cards, and enjoy better benefits.
These are usually the best if you’ll be using the card for grocery and everyday shopping activities. The rewards from using that credit card can translate into a lot of savings for you.
So, before choosing that card, pull out your calculator and see if it’ll help you build your credit.
Pay Quickly and in Full
Here’s the truth about your credit score: it’s just a measure of how you successfully manage your debts. This means if you pay off your debts on time, you’re considered a good “client”.
This is why your credit grows when you make your payments on time. Make sure to pay off your credit card quickly and in full at the end of every month.
On-time and full monthly payments are often reported to the credit bureaus. This is not surprising, seeing as payment history makes up about 35 percent of your FICO score. With consistent payments, you’ll enjoy a higher credit score.
However, if you can’t pay off the balance in full, endeavor to keep up with the minimum monthly payment. It may not bump up your credit score, but it will at least, keep it at the current level.
Also, make sure to avoid late payments. The easiest way to avoid this is to set up an auto-payment feature with the credit card company. This way, you’ll never miss a payment.
People with a history of late payments, defaults, payments going to collections and bankruptcy are considered higher risk clients. Do this once or more and, you’ll see your credit score tank.
Use the Credit Card Like You Would a Debit Card
One of the biggest problems with credit cards is that your account balance doesn’t decrease as you spend the money. Payments are only deducted from your account at the end of the month.
Which is why it’s easy to go on a spending spree with the card. So, do the smart thing and treat your credit card like a debit card. Just because the expenses don’t reflect immediately in your account, doesn’t mean that you won’t still pay it.
Avoid falling into that trap. Instead, remember that the purpose of using your credit card is to build your credit. So, what do you do? Use the credit cards sparingly.
Use your debit cards for the bulk of your payments, and only assign a few expenses to your credit cards. For instance, you can use your debit cards for grocery shopping, insurance, mortgage payments, and utility bills.
While you use the credit cards for things like gas, and streaming services like Netflix and Hulu. This way, you’ll find that you won’t be overstretched at the end of the month.
More importantly, you’ll be able to make those monthly payments with ease. If there’s one thing you must keep in mind while using your credit card, it’s that you should only spend what you can pay in full at the end of the month.
Keep that Credit Card Utilization Low
Your FICO score is also tied to just how much of the credit you use monthly. Known as credit utilization, your credit utilization should never exceed 30 percent monthly. The ideal range though would be between 1 and 10 percent.
So, if you have a credit limit of $5,000, you never want to exceed $1,500 in monthly expenses. And if you can keep it between $50 and $500, even better. This will increase your credit score and help you build that credit.
Very low credit utilization tells the lenders and credit bureaus that you’re a worthy, low-risk client. It tells them that you’re also financially responsible. Which is why people with low credit utilization tend to have higher scores.
People with higher credit utilization tend to miss payments and become overextended because the amounts are too high. Naturally, missed payments mean that you’ll end up struggling to pay off those debts because of rising interest rates.
If you have a lot of expenses and still want to keep your credit utilization low, you should consider paying twice in one month.
For instance, if you have a $5k limit, and need to make a $2k expense, you can spend $1000, pay it off by the 15th, and then spend another $1000 when new credit is issued.
This way, your credit utilization for that month would be 20 percent, as against 40 percent if you’d waited till the end of the month to pay.
Leave the Accounts Open
Closing other credit card accounts when you upgrade to another one feels natural. But it’s not smart. While you could close those older accounts, the reality is that active accounts help increase your credit score. If you do this correctly by having low balances on all your cards, you’ll see your score rise.
Now, if your balance is pretty high, you can take out new ones to help lower your credit utilization rate. It may not be ideal, but it works. There are many providers of credit cards for people with bad credit. You can apply to any of these providers and get the cards.
With these cards, you can drastically lower your credit balance across the board and enjoy a higher credit score in the process. To help you understand, here’s how it works. Say you have a credit card with a $2k limit and a $1,800 balance.
That means your utilization is at 90 percent. If you take out a $5k limit credit card, use only $200 from the new card, it means that you have only used $2,000 out of $7,000. This will bring your credit utilization down to about 28 percent.
Now if you take one more card and minimize your spending, you can see how that will help lower your credit utilization and boost your credit scores.
We understand that taking new cards can be counterintuitive -after all, who wants to take on more debt to pay off one debt. But, the reality is it does work if you don’t indulge in frivolous spending.
And if you have cards that you’ve outgrown, just know that closing those high credit limit accounts can affect your credit score negatively. But, if you decide on closing those accounts, go for those with low credit limits and even lower credit utilization.
Stay Responsible with Your Card Usage
Credit cards can make you feel like you have a bit of money to splurge. Resist this temptation. No matter how high the credit limits may be, just be reasonable with your expenses using your credit cards.
Also, remember to keep the oldest credit accounts active for as long as possible. This will contribute to growing your credit.
Responsible usage does wonders for your credit score and is great for building credit. Even if you are using multiple cards and have great limits, there’s no need to spend those funds.
Just have them as an alternative source of funding for other expenses. In fact, if there’s one thing you should do, it’s to think of your credit cards as an emergency fund.
How Else Can You Build Your Credit?
The aforementioned tips are some of the best ways to use a credit card to get your credit score up. If you need more tips, we would recommend that you avoid additional offers associated with credit cards.
Whether it’s in the form of loyalty programs, frequent flier miles, or reward coupons, these tend to come with some form of hidden charges and fees.
In fact, credit card offers with a lot of perks tend to come with hidden fees. That’s how the companies recoup their expenses.
If you have bad credit or are younger than 18 years, and want to start building your credit, you might want to start using prepaid credit cards. These help you acquire the necessary discipline required to manage the real thing later on.
All you have to do is preload it with a certain amount, and keep your spending limits within the required limits. Just treat it like you would a regular credit card because these habits will help you later on.
Finally, seek out the best credit card offers for your situation. And, if you need the best credit card offers that will help you build your credit, check out our offers at Bonsai Finance.