There are more than 364 million credit card accounts in the United States. According to the American banking association, the accounts average to more than one per adult.
It’s evident that most people accept credit cards as a mode of payment. Unlike cash, credit cards are secure, convenient, and offer different rewards.
Usage of credit cards affects the credit report. They can either cause a negative impact or change it positively. To prevent you from affecting your credit score negatively, we will show you how to build credit with a credit card.
But before then, let’s define the credit terms for a better understanding. Our goal is to help you establish an excellent credit history, and develop good long term financial habits. So, let’s get started!
Understanding Credit History, Credit Score, and Credit Report
Credit history is the past behaviour of the borrower. Companies use it to determine how trustworthy you are and find out your chances of paying the money back.
People with a proven history of on-time payments are considered reliable. People with a poor credit history, including maxed out cards and late payments, are seen as risky.
With a bad credit history, it’s hard for you to get a credit card. If you get one, chances are high that you will only qualify for the ones with low credit limits.
Also, when your credit history is poor, it’s hard for you to secure a loan, rent an apartment, connect utilities, or even get good insurance coverage.
A credit score is a number that shows your risk as a borrower. It also indicates the likelihood that you pay the debt. Credit scores are determined by mathematical models. FICO is the commonly used score brand in the United States.
Most credit scoring models use a range of figures between 300 and 850. A good credit score is considered to be any figure above 700.
A credit report is a record of credit history. The credit report contains important information about your accounts and payment history.
Getting Started: How’s Your Credit History?
It’s important to know how to check credit reports on your own. Errors happen, and so you need to keep a regular check each year to correct false information.
You can access the credit report in multiple ways. Because of the many scores, it might be hard for you to check and monitor each score.
Start by learning about the significant factors which affect the score. When you know the factors, it will be easy for you to see the impact that each action will bring to the score.
Why Credit Cards?
Although you can build a good credit rating without using credit cards, credit cards are more beneficial. Apart from being convenient, they are free to have since they don’t have any annual fees.
Secondly, you can avoid interest when using them, provided that you don’t transfer the balance from one month to the other.
Credit cards have a high buying capacity. Unlike when using cash, you can safely carry more than $10,000 purchasing power.
They are also secure. For instance, if you accidentally lose your card, you can cancel it and call for a free replacement. This is something that you can not do when using cash.
Another benefit of credit cards is that they offer many rewards such as cashback and points. These points add up to savings over time, and they can also give you perks such as free flights. Lastly, credit cards attract discounts, especially on popular online purchasing sites.
How to Build Credit with a Credit Card
As earlier mentioned, a credit card affects your credit in several ways. The process commences immediately when you apply for the card, even when you are denied. The key principle is to use your credit card responsibly and pay your bills on time.
You can also build your credit with a credit card through the following ways:
Check Your Credit Report Regularly
Always request for a free copy of the credit, accompanied by a compilation of data used to determine your score. Your credit report will show you your FICO score. The score will help you to know if you have too much risk, or if you are safe.
Once you get the report, check for errors. Make sure you have not been listed for any incorrect late payment.
If you find the errors, report them to the bureau for corrections. Remember to space out the credit report requests.
Apply for a Credit Card Which Suits Your Score
The best cards require an excellent credit rating. If your score is poor, you will only qualify for a credit card meant for people with poor credit. The perks are not great, but you can improve your credit by limiting the number of applications you make.
Too many applications within a short period will only worsen the credit score. To be safe, don’t apply for the cards which you are sure you won’t get. Search online for the “best credit cards for low credit,” and utilize the one which suits you.
Stick to Less than Two Cards
If you already have one or two open credit cards, stick to them, and avoid applying for more. FICO score records the number of active credit cards you possess. So, if you have many, pick the best two which have the best interest rates and rewards and use them for everything.
Pay on Time
Having a record of on-time payments is an excellent way of maintaining good credit. In fact, the payment time contributes to 35% of the total score.
If you have never taken any loan or a credit card, the chances are high that you don’t have any credit at all. However, you can improve the credit by using your credit card to pay for your daily expenses
When making your payments, try to pay in full. The interest rates on credit cards add up very quickly! So, pay total payments every month to avoid accumulating interest on the unpaid amount, and to improve your credit score too.
Treat the Credit Card as a Debit Card
Don’t spend more than what you have kept in the bank. The money does not come out of the account immediately, and you can quickly lose track of the record and overspend. To be safe, treat a credit card as a draft from your bank account, instead of treating it as a loan.
Learn to check the credit card balance more often- at least once a week. Some credit card companies send the customers daily text messages regarding the owed balance, and so you should check out for that option.
Set Payment or Auto Drafts Reminders
Some financial institutions send email or text reminders when the time to make payments is due. Alternatively, other companies allow you to set an auto-draft reminder.
If your bank does not offer those options, set them on your mobile phone to avoid being saddled with overdraft interests.
Cancel Your Cards With Care
You can hurt your credit score when closing your cards. Closing the cards reduces the overall amount of credit you have. So, unless you plan to change your spending dramatically, you might use more of the available credit and affect your credit utilization rate.
Also, if you have a credit card that is adding the fees expenses, close the card. Although it will bring a negative impact on your score at first, it will start improving with time. This is better than wasting money on the fees.
Remember that the open credit card accounts contribute to 15% of the total FICO score. For this reason, you should avoid opening new accounts just to get the sign-up bonus, and then close them again. The activity lowers the average length of history.
Don’t Forget the Open Cards!
If you have many open cards, remember to use them all. If you keep some dormant, the company will stop reporting them, and this will create a negative impact on your score.
You can keep them active by putting one or two minor recurring payments on the cards. If you do so, be sure to pay them off every month.
A credit score is sometimes based on the age of the accounts. It’s therefore advisable to keep the oldest accounts open. If you decide to close some, leave the oldest and close the most recent ones.
It Takes Time to Improve the Credit Score
Despite the efforts you make to improve your score, don’t expect an immediate change. Inquiries stay on the report for up to two years, while delinquencies remain for up to seven years.
But don’t lose hope. If you observe the above-discussed tips on how to build credit with a credit card, you will definitely see a positive change.
Are you planning to get a credit card in Canada? Contact Insurdinary today and get the best credit card offers available. We will provide you with a list of the available options, and help you choose the best rates and rewards available.