People fall into 2 major categories. Those with credit cards and those without. Whether you’re in one or the other you need to know that credit cards are an essential element in improving your credit score. So, let’s talk about how to use credit cards to build a credit score for both groups.
People Without Credit Cards
I totally get it. Maybe you’ve had credit cards in the past and things got a little out of hand. You let the balances get a little too high and had a hard time paying them off. Now you just want to pay cash for everything and stay out of trouble. That would be a good plan if you didn’t need to finance anything, ever. You would never need a mortgage or a car loan. You’ll never try to rent an apartment. No need for car, renters or homeowners insurance. Or, you simply move to a country where credit scores aren’t checked like they are here in the States. But let’s assume you stay in the U.S. and eventually need to do some of these things. If you don’t have at least one credit card you are missing a very important tool for building a good credit score.
How a Credit Score is Calculated
Payment History- 35%
Amounts Owed or Debt Utilization- 30%
Length of Credit History- 15%
New Credit- 10%
Types of Credit- 10%
Getting or having a credit card can positively impact all 5 of these categories. That’s assuming two things. Payments are made on time, and balances are kept under 30% of the limit of the credit card limit. Using revolving credit such as a credit card also shows future creditors responsible use of credit.
You may not think it’s fair to have your creditworthiness judged based on these or any other factors. Or judged at all. But those are the rules that all people living in the U.S. must play by if they want to be able to get credit. If you do not have at least one credit card you are going up to the plate without a bat in hand.
Want a Credit Card but Have a Credit Score Too Low to Get One?
Get a secured card. Secured credit card issuers will give you a card because they ask you to put an amount of money on account with them to “secure” the card. They, in effect, are getting their money up front in the event you don’t pay the balance. That amount is equal to the limit of the card. This is a great way for you to ensure you don’t get irresponsible with credit cards. If you get a secured card make sure it reports to all 3 credit bureaus to best help you build your credit score. Here’s one that we recommend.
People with Credit Cards
Good for you! You are utilizing a tool to help you have a positive credit score. But that tool can become a double-edged sword in a few ways. I already shared one way. If you let the balances go over 30% of the limit of the card and can’t pay it down quickly, you are then hurting your credit score. Pay very close attention to this. Know what your credit card limits are. If you go over that 30% threshold stop using the card and pay it down.
However, there’s more to pay attention to if you have credit cards
If you do not pay the balance down to zero every month this is important. What’s the interest rate or APR on that credit card? Even if you keep your balance below 30% you are still paying interest on that balance very month. The interest you pay can add up to more than half of the balance. In some cases, the interest paid can far exceed the balance.
25% interest rate
$30 minimum payment (3% of the balance)
By making only minimum payments it will take over 11 years to pay that balance off and it will cost you $1,499 in interest. So that $1,000 balance turns into $2,500 paid to the credit card company. And, this assumes you don’t use the card at all during this time period.
How to Use Credit Cards to Build Credit Score
- Get out a note pad. Write down all your credit cards (Note- if you have more than 3 credit cards you might be hurting your score by having too much credit available. However, DO NOT CLOSE AN ACCOUNT IN GOOD STANDING. It will negatively impact your credit score. Just don’t use the excess cards)
- Look at your statement or call your credit card company and determine the limits on the cards
- Note the balances
- Write down the interest rates
- List the minimum payment amounts for the current balance
Pay attention to the following:
- Are your balances above or below 30% of the credit card limit? If so, by how much?
- Is the interest rate on any of your cards above 17.67%? That is the current average APR (average percentage rate) on all credit cards as of the date of this post. To check the current average credit card APR just Google it.
- Are you paying more than the minimum payment each month? If not, start doing that even if the balance is below 30% of the limit. The goal is to pay as little interest to the credit card company as possible. That’s money out of your pocket.
- How long will it take you to pay that card off using your current average monthly payment? To determine this use this Credit Card Interest Calculator
If your balances are 30% or more of the limit establish a plan to pay them down. Stop using the cards until you have accomplished that goal. Then once you start using them again keep the balances under 30%.
What If Your Balances Are So High You’re Getting Eaten Alive by Interest?
If the balances of your cards are out of hand and you can’t afford to make more than the minimum payment then you need to get out of that card. How do you do that? By looking for offers to transfer that balance to a new credit card that gives you a year or more interest-free!
This is a great strategy because it will give you a year to make payments that are applied completely to the principal balance. That means every dollar pays down the balance. This could give you the opportunity you need to pay down or pay off that card!
To find offers for transferring balances on existing cards visit No Interest Transfer Balance Credit Card Offers
Conclusion- Use these quick and simple steps on how to use credit cards to build your credit score.
If you have credit cards pay attention to how you’re using them and play the credit game as well as you can. If you use your credit cards correctly you can impact your credit score significantly.
If you have negative accounts on your credit report we can potentially get them removed for you.
For more information visit Credit Repair.