Watching the news and reading information about the debt crisis in the United States might make you think about avoiding a credit card. This strategy is not altogether a terrible one, but don’t overlook the fact that using a credit card to start building credit is actually a great way to start the process of buying a home, a car, or any other major purchase for which you need a good credit rating.
All of those things – car, home, and personal loan applications – will all be rejected if you have no history of credit. Even student loans need to be co-signed by parents. There is yet to be a child entering college that has already proven themselves a trustworthy creditor.
3 Expert recommendations for using a credit card to start building credit
Building credit essentially comes down to proving yourself able to pay back debts. Therefore, the way to build credit is to take on debt and pay it back on schedule. Here are a few of the best recommendations for building credit with a credit card.
1. Get a secured credit card to start building credit
A secured card is by far the safest method of building credit. For people that have never used credit cards before, there is always a risk of using the new balance of credit irresponsibly. Irresponsible behavior and missed payments will put you in a hole for building credit right off the bat.
A secured credit card is essentially a way of lending money to yourself. You pay a bank or credit union a specified amount, which will then be the balance of your card. For example, you give the bank $500 for your secured card, and you will be given $500 of credit on that card.
This does not mean you do not have to make payments on the card. The secured payment is essentially collateral if you fail to pay in the future. With a secured card, you pay the bill as if it were any other credit card. In this way, you prove your creditworthiness and build good spending habits. With a secured card, you can progress towards the opportunity to have an unsecured credit card with a larger balance. But, you better have built the following habits to maintain your good credit standing.
2. Pay your bill in full each month
If you carry a balance on your credit cards, that has the potential to hurt your overall credit score. Your available credit is calculated by how much credit you are allowed versus how much you use. If you don’t pay off your bill in full each month, you steadily begin to use a higher percentage of your credit.
Your credit score will go down as you begin to use a higher percentage of your available credit. As you build a history of making reliable payments on your card, the bank might even increase your credit limits. This does not mean you should use the entire limit. Be responsible.
3. Use your credit card to start building credit responsibly
If you are only paying off the minimum amount each month, it’s only a matter of time before you acquire unmanageable debt. Only buy things you know you could pay for in cash.
Using your card responsibly does not mean you need to avoid using it. The game of building credit is one that you can’t win if you don’t play. This means you need to use your cards so you can prove yourself a reliable creditor. Card usage could be in small amounts. Use your card for only essential purchases you know you can pay back right away. Many cards offer points for money spent on gas, so it could also be a good way to build rewards.
Think of credit not as something you have, but as something you can get in the future. The credit you have on your first credit card is nothing like the credit you will be looking for when you apply for a car or home loan. That is the real credit you want, and you will only be able to get it if you prove yourself worthy of it now.
How have you been trying to build credit?