Many Finance and other similar experts try to discourage people from using or applying for credit cards. It is not without reason; however, as quite a few people tend to abuse them and end up in dept. Nevertheless, if used responsibly, credit cards can have several benefits.
To start, one of the benefits of credit cards include signup bonuses. Those that have good credit can receive up to $500, in some cases, while others will reward newcomers with various reward points. Besides, you can earn points based on how much you spend, redeeming them for gift cards or other rewards. Some cards even offer cash backs or frequent flyer miles.
What’s more, credit cards can keep you safe from theft or fraud. If someone steals your debit card, the money will disappear from your account instantly. With a credit card, you must notify the credit card company, and they will handle the situation. Similarly, many credit cards come with numerous consumer protections such as car or travel insurance, as well as product warranties, etc.
Another benefit of having and using a credit card responsibly is to improve your credit score. Below we’ll be exploring several ways to do just that with your credit card.
Applying for Secured or Starter Credit Cards
Starter and Secured Credit Cards are an excellent option for people who either have no credit or have developed lousy credit over time. Secured credit cards require users to place a refundable security deposit – which will then become the credit limit, preventing you from spending beyond that. Starter credit cards are somewhat similar but don’t require a security deposit and generally have higher interest rates and fewer rewards. Nevertheless, both are good for people with bad credit or limited credit to build up their score, granted they’re used responsibly.
Making Purchases and Paying on Time
Another good way of raising your credit score is by using your credit card. If you make purchases and pay them off on time, you’ll demonstrate that you can be trusted with sticking to payment deadlines. If you never borrow money, it will be hard for creditors to determine what you’ll do if you did. It’s probably best to stick to less than 30% of your credit when making monthly purchases and pay them off before your due date.
It’s good to remember that the total amount you owe as a percentage of your available credit makes up 30% of your FICO score. The more you spend, the higher the chance you will miss payments
Treating Your Credit Card Like a Debit Card
A useful tip for when using a credit card consistently is to handle it, more or less, like a debit card. It’s important to keep in mind that your bank account’s balance will not change when you make purchases with a credit card. It is the main reason why so many people overspend with their credit. They lose track of how much they spend and go past their limit.
It’s best that you treat your credit card as if it was a debit card. It means spending only as much that you know you will be able to repay in full when you receive the statement. It will help you raise your credit score, avoid carrying any balance and experience higher interest rates.
Pay Attention to Your Grace Period
With most credit cards, you’ll typically get a 21-day grace period to submit payment before you start owing any interest. Ideally, you should pay off your debt as soon as you receive the statement, thus lowering the chance of being late with your payment. It’s also a good idea to pay it in full. Otherwise, you’ll lose your grace period and charged interest on the purchases.
Lower or Limit The Number of Credit Cards You Own
Even though it may be tempting, it’s best to have only one credit card. It includes store cards, gas station cards, etc. Too many credit cards will reflect poorly on your credit report. Store cards, for instance, typically have a high-interest rate. They know that the majority of people don’t tend to pay the balance in full every month, meaning that they end up making more in interest than they offer in savings.
When trying to build your credit, it’s best to stick to just one card with no annual fees, low interest rates, and a small credit limit. Some of these cards may also offer you cash backs and various travel offers, allowing you to save money over the mid to long-term.
Keeping You Accounts Open
The longer you have and use credit, the more predictable you are to lenders and the better it will be for your credit score. The length of your credit history accounts for 15% of your entire FICO score, so the sooner you open a credit card, the better. But you also need to keep your accounts open and active. It’s unwise to open credit card accounts to take advantage of the sign-up bonus and to close them immediately after. Every time you open or close a credit account, your credit score will take a hit. Pick one credit card that best suits your needs and keep it long-term.
The Zero Balance Credit Card
If you already have more than one credit card, it could be advisable to use one and keep the other open with a zero balance. As we’ve already established, closing a credit card can harm your credit score. So, instead, you should keep it there and never use it. When you have an open credit card account with a zero balance, credit bureaus will interpret it as available credit that you never tap into, increasing your credit score, in the process. But for this technique to make financial sense, that zero balance credit card must not have an annual fee; otherwise, you’re just wasting money.
Becoming an Authorized User
If you are underage or have been unable to get an account, you can still build your credit by becoming an authorized user on someone else’s account. It means that you can make purchases on their credit limit while the other person is responsible for making the payments. Being an authorized user will not build your credit as fast as owning your own card, but the account information will appear on your credit report, nonetheless.
While these strategies presented here will help you build your credit with a credit card, you should keep in mind that there is no quick fix to the issue and it will take some time before you can increase it by a significant margin. By paying your debt on time, by keeping your balances low, and by making a long-term approach, you will be able to get there. For more information, feel free to visit our website.