How To Use a Credit Card to Build Credit
Updated August 06, 2016
It is important to realize that while many people stress the importance of building your credit that you may end up damaging it if you do not use your credit card wisely. There is a difference between no credit history and a poor credit history and how it affects your credit score. Additionally, you can qualify for a home mortgage without having a credit card. It may be a bit more difficult to find a lender, but it does not mean that you will have to pay a higher interest rate .
If you want to build your credit using a credit card you need to follow these four steps to do so safely.
Limit the Number of Cards You Have
You do not need more than one credit card. This includes gas cards. store cards and any other type of credit card. One credit card is all that you need. If you have too many credit cards it reflects poorly on your credit report. You may justify your store cards because of the discount. The stores are not offering the discount to be nice. They know that the majority of people do not pay off the balance in full each month, and they make a lot more in interest than they offer you in savings. It can be tempting to spend money you do not have when there is a sale. Don’t tempt yourself. Be sure that you choose a good credit card with low fees and penalties.
Limit Your Credit Limit
You can call and request that your bank will not automatically raise your credit limit .
This will stop you from getting out of control with your spending as well. You may consider setting your limit at $500.00 or $1000.00. This should be plenty to handle any spending that you may need to do in one month. If you focus on paying off these lower amounts, you should be able to fairly easily.
Pay Off Your Balance in Full Each Month
You build your credit history by showing that you are responsible by paying your monthly payments on time, regularly. Pay on time and the full amount each month. By staying within your
budgeted amounts on all your spending, you should be able to do this. You can avoid carrying a heavy debt load by simply never charging something that you can not pay cash for. This is the most important thing you can do to show that you can manage your finances and build your credit history.
Keep the Amount of Your Used Credit Low
Using a large amount of your credit or nearly all of your available credit will make your credit score drop. If you do carry a balance for a few months, be sure that you keep the used balance around thirty percent of your available limit. If it goes higher than this and especially if it reaches the limit, you can see your credit score drop. It is important to keep this in mind if you are using your credit cards to improve your credit score.
Avoid the Free Offers That Come with Credit Card Applications
You may be offered free pizza, t-shirts and numerous other gifts for applying for a credit card. You may figure that signing up just once will not hurt anything. You will cancel the card as soon as you receive it. These canceled cards do show up on your credit report. Save yourself the trouble by simply not applying. This will save you money and time in the long run.
Another option is to consider using a prepaid credit card. This gives you the chance to handle your money responsibly and shows that you are ready to apply for a credit card with a line of credit after a few months.
You need to be sure you are financially ready to handle a credit card before you apply for one. This means you are able to stick to your monthly budget, and that you know you will be able to pay it off in full each month.
It is important to realize that credit cards are not really bad. However, they can be easily mismanaged, and if you do not handle them properly you can end up in a lot of financial trouble. If you know that you will not be responsible with them, it is best not to have them at all.