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Building credit can be quite the challenge, and some consumers struggle to get their score raised even just a little bit. The truth is that there are many ways to build credit, and one of these ways is through the use of a credit card. The key to using a credit card to build credit is to do so responsibly. A credit card can affect your credit score for better or worse.
Credit cards have definitely gotten their share of bad coverage in the media, with many Americans in over their heads. After all, it is easy to find yourself in debt with irresponsible credit card usage. Instead of using credit cards as a way to just get more ‘stuff’ that you can’t afford, how about using it in a way that will boost your credit score and help your overall financial standing. Here are some tips for using a credit card to build credit.
Pay Off All Balances in Full and On Time
Many consumers may not realize that keeping a balance on a credit card can sometimes be detrimental to their credit. It is really important to pay off all balances in full and on time each month. Late payments will not improve your credit at all, and can actually put a pretty big dent in it. A good reporting history of on time payments is something that lenders look for.
Paying balances in full also has its benefits and rewards. Interest rates on certain cards can be sky high, and people that just pay their minimum balance each month may find themselves paying just the interest. This can really pose a problem for people wanting to get themselves out from under credit card debt.
After getting a credit card, be sure to keep balances paid on time and in full whenever possible to avoid any extra penalty fees, penalty APRs, and interest tacked onto the balance.
Find the Ideal Credit Utilization Ratio
Controlling your credit utilization ratio can help you in a number of ways. Utilization ratio is the proportion of your overall credit limit to your available credit, and it is an important factor in your credit score and history. According to many sources, an ideal credit utilization ratio is around thirty to forty percent. Generally, consumers who have such a credit utilization ratio are viewed more favorably by lenders.
Credit utilization ratio accounts for all lines of credit to your name, including credit cards. With that in mind, you should check to see what credit is available in your name, then see how your credit card debt and limit factor into your overall ratio. You may need to pay down debt to reach the ideal utilization range.
>>Read more: How to increase your credit limit
Avoid Paying Fees When Possible
Many credit cards are packed with fees, but oftentimes, consumers miss this information when applying for a new card. Before accepting an offer for a credit card, it is a good idea to check out the full terms of service (including any rates and applicable fees). Look for simple fees, such as annual fees, cash advance fees, balance transfer fees, and even foreign transaction fees. You can even go a little and make sure there are also no hidden fees.
If possible, choose a card that has no, or a low, annual fee. If you have fewer expenses, it should be easier to manage your credit card, so you should be in a better position to build credit constructively. Remember, there are many great cards out there that have no fees whatsoever!
Try to Keep a Relatively Low Balance
Finally, we already touched on this, but it is important to keep your balance low. If you cannot pay your balance in full each month, then you likely won’t be able to understand how to build credit with a credit card effectively. By trying your best to keep it relatively low, you can increase your chances of paying in full each month, while reducing the window for fees and interest to accrue. The only potential issue may be reaching the proper credit utilization ratio; however, you should prioritize making payments successfully over reaching a certain utilization ratio.
While many consumers find themselves in a whirlwind of credit card debt, it is easy to see that credit cards are not always inherently bad. The good news is that using them the right way can actually make them more of a tool rather than a hindrance to one’s credit score. If you are in the market for a credit card, make sure to shop around and find the right one with the right benefits to make building your credit easier on you.
Author: Jeff Gitlen, CEPF®
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