Credit cards can be complex and intimidating, especially considering the number of people who find themselves deeply in debt. However, properly managed credit cards can significantly improve credit and contribute to financial success. If you are trying to build credit for the first time, maintain your current good credit standing, or recover yourself from bad credit, the following tips will increase your confidence and give you a better understanding of how credit cards can help you build the credit you want.
Learn How Credit Can Affect You
Many people don’t consider the ways in which credit affects them until they are face-to-face with a situation that calls for a good credit rating. You might be buying your first car, renting an apartment, or turning the utilities on in a new home. In each instance, your credit history can be a deal-breaker. It can also affect your chances at employment. More employers are beginning to run credit checks on potential hires and companies expect prospective employees to be honest and responsible. A simple credit check can tell an employer how you handle your responsibilities when you aren’t at work, and good credit can convince them that you will be a valuable employee. You don’t want to be turned away for a job for no other reason than bad credit.
Consider a Secured Credit Card
If you are just starting to build credit or are climbing back from bad credit, consider applying for a secured credit card. This type of card requires you to put down a refundable deposit, which acts as security and defines your credit limit. You can make purchases against the card and pay them off, all while maintaining your deposit. While secured credit cards can be essential for those looking to build or rebuild credit, be sure to read the fine print to prevent yourself from ending up in a worse place than you started. If you don’t pay attention you may end up with a secured credit card that doesn’t report your payment information to credit bureaus. Consistent, on-time payments are essential to building good credit. If the credit bureaus do not have this information, your credit will not improve.
Switch to a Better Card
Once you have sufficiently built your credit to either convert your current card to a standard, unsecured credit card – or qualify for a new card if your current card will not convert – you need to follow the same rules you learned in the previous tip. Make payments consistently and on-time. To get the most out of your credit cards, pay off balances each month to prevent interest fees or at least attempt to maintain a balance no more than 20-30% of your credit limit. A debt-to-credit ratio much higher than this will have a bad impact on your credit score and may prevent lenders from approving your requests for more credit.
Having Too Much Credit
Overextending yourself is never a good option, but having multiple credit cards can be good or bad, depending on how you use them. The most important aspect of analyzing the strength of your credit is credit utilization. A good credit score is largely based on your debt-to-credit ratio, or how much you owe compared to what your credit limit is. Multiple credit cards with zero balances may work in your favor, but only if you can effectively manage them. A missed or late payment will count against you and can negatively impact your credit score.
Close Accounts Responsibly
Many people believe their credit will be improved once they pay off a card and close the account. However, this can actually work against you, since it increases your debt-to-credit ratio, even if your actual debt has not changed. Here are a few things to keep in mind if you would like to close some of your credit card accounts:
- It is best, especially if you are planning a significant purchase in the next 3 to 6 months, to keep your accounts the way they are. Lenders will note significant changes and overall will appreciate a lower utilization ratio.
- If you decide to close a credit card, try to close the one most recently opened, as your credit score partially depends on how long you have had an open account. Being a long-term customer is a mark in your favor.
- If you are closing multiple accounts, don’t do it all at once. A drastic change to your credit may negatively impact your score.
The best step you can take in building your credit and responsibly managing your credit cards is to stay informed. Visit www.annualcreditreport.com and get a free credit report each year from the 3 major credit bureaus. It is an essential part of taking control of your financial future.