Having and building a credit is one of the critical goals of being financially secure in America. Credit score is used to determine whether one qualifies for a loan, the interest rate to be charged, housing and employment among other issues.
A credit card is one of the most powerful instruments that help construct and preserve a favorable credit history. Credit cards should be handled with respect as it creates ones credit history file which is so important in the financial world.
This piece will go deeper in explaining the basic steps that can be taken to ensure one is using the credit cards in the right manner and ways that would enable one to improve his/her credit.
Understanding the basics of credit cards
Credit cards do not only offer convenience when it comes to payment but they are also essential tools to have. Mastering the simplest facts about credit cards will help to use them properly for credit creation.
Credit cards work in such a way that when you want to buy goods and services you are spending another person’s money that you are expected to repay back with an agreed interest at a later agreed date, mostly monthly.
How credit cards impact your credit score
This is a numerical figure that describes your credit rating and is computed using some characteristics. Credit card usage affects five main components of your credit score: payment history, the amounts owing, length of credit history, new credit, and kind of credit the consumer has been using.
- Payment History (35%): Late payment is considered the leading cause of conscious credit score drop. Timely payments on your credit card bills establish the borrower as a creditworthy one thus making all the on-time payments.
- Amounts Owed (30%): It is also commonly referred to as credit usage, it relates to the proportion in which you use your credit cards between the amount of credit provided on the cards. Utilization ratio is another important factor that plays an important role since it is ideal to keep it below 10%.
- Length of Credit History (15%): Ideally, the credit history the longer, the better. This aspect can thus be positively influenced by the keeping of old credit card accounts open.
- New Credit (10%): Having several new accounts opened within a short time can be deemed as reckless and will in many cases drag your score down.
- Types of Credit Used (10%): It is good to have diversity in the credit accounts that one has, that is; credit cards, mortgages as well as auto loans.
Awareness of these components is crucial to the proper utilization of the cards to establish credit. Now, we are going to identify some ways through which you can optimize on credit card usage.
Using credit cards responsibly
Credit cards have their own utility in a person’s financial or monetary life but they should be used wisely and that wisdom involves discipline, timely payments and financial planning. Here are three key strategies to help you build credit effectively:
Pay your bills on time, every time
Your Payment History is without a doubt the most important determinant of your credit score. Hence, what is key is to pay your credit card bills as often as possible and at the due time. Delays in payments have adverse effects such as pulling down your credit score, and the records will be on your credit profile for about seven years.
To ensure this, one should use online functions and set an automatic payment through the bank or credit card company. Most of the credit card have the convenience of being able to set up payments that are automatic and at least the minimum payment amount can be made automatically.
If you ever find yourself in such a situation that you are unable to pay the full amount each month, be sure to pay more than the stated minimum amount. It assist in paying off the outstanding amount faster and many times it does not attract interest.
Maintain a low credit utilization ratio
Something as simple as the credit card balances relative to the credit limits holds a lot of importance in credit score. High credit utilization is suggested to affect your score since it portrays tendency to use credit.
Ideally, to maintain a good credit score, one should ensure that the credit utilization of a card does not exceed 30 percent, but lower figures are preferred. For instance, if your total credit limit for all your credit cards is $10000, avoid reaching the amount of $3000 in your credit cards.
It is preferable to clear the outstanding balances to get a 0 as much as possible. If full payment is not possible, it is advisable to pay in installments that span the whole month hence having low balance most of the time.
The other is to ask for an increase in the credit limit from the card issuer company or the bank, which has provided a credit card. Thus, a higher credit limit can decrease your utilization rate if you do not raise your spending in proportion to your credit limits.
Diversify your credit mix and monitor your credit regularly
The credit accounts composition could also be a factor that has a positive effect on your credit score. Although credit cards are a great first step, there are other forms of credit that one should apply for and include, for example installment credit (car loans, personal loans or a home mortgage).
It is also good for your credit health to maintain a credit report check frequently. In this case, it is essential to conduct a credit check to see if there are negative entries that can either affect your score or are cases of identity theft.
The three credit bureaus are Equifax, Experian, and TransUnion and they all permit you to request your credit report once a year through AnnualCreditReport. Also, most credit card companies offer free credit tracking services that can assist in monitoring the progress within the credit score and the changes that have occurred in credit history.