Credit cards are one of the biggest players when it comes to your credit score, which is why it’s crucial that you not only have a credit card, but that you use it. Of course, using your credit card irresponsibly will result in serious damage to your score, so keeping your use responsible is instrumental. Luckily for you, the whole process only takes a little bit of help, like following these rules.
What You Need To Know About Building Credit With a Credit Card
When you’re applying for any type of credit the businesses that you apply through will use something called your FICO® credit score. In computing your score, a number of different factors are considered, but two of them are more important than the rest.
When it comes down to it, your credit utilization ratio and your payment history are the ones you need to pay the best attention to. Of course, what you get in regards to a credit score is going to be based on how well you know how to use your credit card.
Let’s look at the first part first. Your payment history is based on whether or not you pay your credit card on time, and it accounts for 35% of your total score. But it’s not based on credit cards alone, it’s how you pay any type of credit accounts you have.
Next up, is the credit utilization ratio. This ratio is actually responsible for 30% of your credit score and relates to how much of your credit card balance you’re actually using. Each month, it looks at how much of a balance you’re carrying over all of your cards compared to the amount of total credit you’ve been offered, also across all of your cards. When you have a lower balance compared to what you have available you get a better result toward your score.
How Many Cards You Have Causes an Impact?
So, how many credit cards should you have? Unfortunately, there is no ideal number out there, but having at least one will allow you to build up your credit.
What the research shows, and credit scores show, is that using your credit card responsibly is more important than how many you have (or don’t have). That means you want to look at your credit utilization and even at the history of payments that you have so you know what your credit score is really going to look like.
Now, even though you don’t need a lot of credit cards, having a few of them could be a good idea because instead of using only one card, and carrying a larger balance, you could have smaller balances on each.
Of course, it’s important to note that your credit utilization isn’t always considered only based on individual cards. If you have a small balance on several cards it can also be counted as the total balance you carry versus the amount available.
Your best bet is going to be keeping balances low at all times and then paying them off completely. Paying the full balance each and every month actually makes sure your payment history continue to look great on your report.
When you do use multiple cards, however, make sure you’re paying close attention to how much you spend and how much you can afford to pay. It can be a problem to spend too much and not pay off those balances.
On top of that, make sure you monitor your due dates to get all your cards paid on time.
The Importance of Credit Utilization Ratio
When you look at the credit currently being used and you divide it by how much credit is actually available you get the credit utilization ratio or rate. It means how much you owe divided by how much you’ve been given (your credit limit). What you’ll normally find is that this is a percentage. So, let’s say you have a credit limit of $20,000. Then we say you’ve spent $10,000. You’re ratio is 50%, over all of your credit. You can use the same division to determine your ratio per credit card.
Of course, because your utilization is counted for up to 30% of your credit score, it’s important to look at all the time.
Keeping your utilization down keeps your score higher. That’s because most credit reporting agencies consider lower utilization to be a sign that you know how to keep track of your credit and your debt. That means you get a better score.
Building Your Credit: Tips and Tricks
Building your credit is a long journey, but if you follow the right steps – it can be quicker and easier. Here are the most important rules to follow in order to build your credit effectively and efficiency:
1. Paying Credit Cards Bills On Time
Do you know how important your payment history actually is? Paying your credit card bills on time, also known as your payment history, is worth about 35% of your credit score. Starting with the initial six month period and going backwards, your history is crucial.
If you’ve got no history at all it’s important to find a way to create some by paying a bill with your card. If you can’t pay that bill off, however, don’t put yourself into debt. Only use this method if you can pay off the card every month so you can get updated information to your report. Plus, you don’t have to worry about interest if you pay off the bill each month.
2. Don’t Miss Your Payments
Unfortunately, some people tend to fall into a bad habit, paying bills late but you can improve. If you missed a payment six months ago it’s going to count more than if you missed a payment three years ago. Your FICO scores will continue to increase and to improve as you move forward.
The improvements to your FICO score will improve your information overall and as a result – your ability to get better financial conditions.
3. Don't Cancel Your Card
It’s important to have a long history of credit use to increase your record and your FICO score. You probably didn’t realize just how important that first card really was but responsible card use is crucial.
If you find yourself opening and closing cards frequently it can cause big problems. Instead, keep a single card as long as you can and use just that card. Your average credit age is an important part of the credit score, giving you about 15% of your FICO score. When you open or close an account it changes your credit history age and that brings down this portion of the score.
4. Don’t Overspend
The higher the balance that you have on your credit card the worse it’s going to look for your FICO score. Keeping your balance down to 30% or less of what your total available is will help you overall, even if you’re not paying it off every month.
Balances that are higher will start to decrease your score. If you want your credit card to help you along the way and improve your score it’s crucial to keep this in mind.
5. Quality Over Quantity
Having more than one credit card isn’t necessary, whether they’re store, general or even gas cards. More and more credit cards will actually make you look worse to credit reports. Unfortunately, it can be difficult for some to refuse the discounts offered with store cards. Even still, you may want to avoid them entirely.
A store card will typically have a high level of interest and since most people tend to not pay off their credit cards every month they know they’re going to get a lot of money out of you.
After all, it’s difficult to avoid spending money when there’s something special going on. When you get a better credit card, you can keep lower interest rates, low limits and even no fees. You can even get bonus points if the card you have that does all these things also gives you some kind of cash back.
6. Don’t Forget Your Payments
Remember how we talked about payment history? Well, it’s crucial that you take advantage of bank reminders if your institution offers them.
Whether it’s emails or texts or anything else, having reminders or, better yet, automatic payments, will make a huge difference. Keeping your payments on time will make a dramatic difference in your credit report. Just make sure you pay more than the minimum.
7. Request a Credit Limit Increase
Okay, so you’re making your payments on time, you’re spending less, you owe less and you’re starting to build your way up. Now it’s time to start thinking about an increase for your credit card. Remember that your credit utilization is about how much you spend versus how much you have available.
By keeping your score down to no more than 30% you’ll be able to improve your score. If you’ve got $10,000 of credit available and you’ve spent $2,000 it means your utilization is at 20%, which is good overall.
But increasing your limit can make your ratio even lower.
8. Start Secured
What if you have bad credit and you aren’t able to just apply for any old credit card? That’s when you can consider a secured card.
The first thing to think about is how much money you’re willing to deposit into your account in order to get your credit card. With a secured card you have to leave that money alone because it gives the card issuer something to take in case you don’t pay your bill. You likely need to have the money in an account with that card issuer or in an account they can access one way or another. Fortunately, you may be able to get some type of interest from the deposit.
Not paying your bill, however, means that your money will be seized and the bank won’t have a problem doing so. People with bad credit, after all, are expected to continue to do the same again and again.
If you need to rebuild your credit and you can’t get a regular card then look for a secured credit that will get you on the right path.
How Long Does It Take To Build Credit?
Of course, you may be thinking about just how long this is all going to take. Unfortunately, it’s not going to be a super quick process. Your credit history builds over time and it will only continue to go up if you continue to do all of the things we’ve discussed here.
Making your accounts current is the first step, and it can take at least a few months of reporting to get this to reflect. Paying bills on time is the next step, and then making sure you don’t use too much of your balance and do use your cards the way they’re supposed to be used. If you do, you’ll be on your way to better credit.