Credit cards can sometimes be viewed as a dangerous tool. And let’s not kid ourselves; the danger is real. When we don’t use credit cards correctly, they become a financial vehicle to a life crippled by debt. Still, using them to build credit is important and valuable. There are some shaky ways to do that, but we’re going to go over the best way to use a credit card to build credit, because that’s what counts.
The financial world has been built into a sort of catch-22. You need to use credit to build credit. If you don’t build credit, nobody will give you the loans for the large purchases you want to make in the future (i.e. cars, homes, or starting a business). Financial education is also limited so you don’t know how to build this credit wisely.
That is what we want to change. The information here is what I have learned through falling into the traps myself. I have made financial mistakes and learned how to operate more effectively because of them. Now, I share with others so the same mistakes aren’t made.
Why do I need to build credit?
First, it is important to understand why credit is important to you. Credit is the record you accumulate on debts you have and how you have paid them. If you pay debts regularly and on time, you will have better credit. If you miss payments and have large debts, you will have poor credit. That’s the simple version.
Without some track record of credit, you can’t get loans. In many cases, even with a decent credit history behind you, you may still need someone with more credit to co-sign with you for a car or home purchase.
There are many factors that go into your accumulated credit score. Credit cards are only a piece of the equation, but they are an important piece, especially when you are just beginning to develop credit.
The best way to use a credit card to build credit is to take learn the system
Some factors that weigh into your credit history are more important than others, but some of them you can’t do much about in the short term. Here are the most important ways your credit card usage impacts your score and how you can use these factors to improve your credit.
This shouldn’t be a surprise: the best way to use a credit card for building credit is to make payments. Your payment history is a running tally of the percentage of payments you have made on time. This means a longer history with fewer missed payments is to your advantage.
The shorter your credit history is, the more a missed payment will hurt your score. So, the first thing you can do to get your payment history up is by using your credit card. This is an important factor in your overall credit score, so make sure you don’t miss a scheduled payment or it could have a heavy impact on your score.
Your credit usage is a measurement of how much of your available credit you are using. This means, if the available credit on all your cards combined is $20,000 and you have a $5,000 balance across those cards, your current credit usage is 25%. In other words, you are using 25% of the credit available to you.
The lower your usage, the higher your credit score will be. Anything under a 10% usage is considered fantastic but in this case, the best way to use a credit card for building credit is to always pay your monthly bill in full. This means you will not be carrying a balance and your usage will always be close to zero.
If you find yourself in a situation where you cannot pay off all your debt in one payment but want to improve your score, you could also think about increasing your limits. As long as you are not adding to your balance, having a higher limit will lower your usage and improve your score.
The age of your credit history is an important factor that you can’t do much about. Get your first credit card as early as you can. The longer you have it, the more it will help your credit score. Your credit age is the average age of all your credit accounts. Therefore, it is in your best interest to keep your oldest account open, even if you don’t use it anymore.
On that same line of thinking, if the oldest account you have is 20 years old but you have others that you recently opened, those younger accounts are weakening your credit age. If you don’t use the younger accounts, closing them could help your credit score by improving your credit age.
Each of these strategies has advantages but the best way to use a credit card to build credit is by using all of these tactics together. A credit score is an accumulation of many factors and having as many of them on your side as possible is your best choice.
What do you look for in a credit card?