Have you considered getting a credit card to build credit, but haven’t because you’ve seen someone get sucked into credit card debt? It’s hard to build credit when credit cards seem to only be good for getting into debt. Building and using credit wisely doesn’t have to be scary, but it does take discipline.
Keep reading to get a better understanding of your credit score and credit report, as well as tips on how to use credit cards safely.
Your credit score is a number that helps lenders determine your creditworthiness or the likelihood that you’ll repay borrowed money.
This three-digit number is an important part of borrowing money to buy a house, a car or some other major purchase. Credit scores are often also used when you apply to rent an apartment or set up utilities.
Most scores go from 300 to 850, and the higher your score, the better. A higher score gives you access to better credit terms, like lower interest rates.
The factors that make up your credit score include:
Possible loans get you quick cash and help your credit score.
Credit cards are one of the most common types of credit accounts. They’re often easy to obtain and use.
However, they can sometimes be too convenient and are known for sinking people deep into debt.
Since getting into credit card debt is so easy, why use a credit card at all?
There’s actually a surprising number of advantages to using credit cards over cash or debit cards, including:
The key to using credit responsibly is to not spend more than you can afford to pay back in one pay cycle. Credit that uses a fixed payment, like a mortgage or car loan, can be easier to use responsibly.
Credit cards, on the other hand, can sometimes be difficult to use without overspending.
Follow these easy tips to help you use your credit card wisely and avoid putting yourself into credit card debt.
Be sure you carefully read the terms and conditions before signing up for a credit card. For example, most credit cards have high interest rates but some give you a lower introductory rate.
You’ll want to make sure you understand when your introductory rate ends and pay off your balance to avoid paying a higher interest rate. The same can be said for any late payments you make. Many cards will end the introductory period early if you miss a payment for any reason, leaving you with a higher interest rate.
The best way to use a credit card is to think of it as a debit card or cash. Only put purchases on your credit card that you have the cash to cover. This lowers your chances of overspending and not being able to make your payment.
Credit card companies require you to pay a minimum percentage of your balance each month. This is known as your minimum payment. By making at least the minimum payment each month, you’ll avoid late fees and penalties. However, you’ll still have to pay interest on any remaining balance, which can lead to a much higher repayment amount in the end.
It’s even better if you can pay off your credit card balance in full, or pay more than the minimum each billing cycle. This helps you cut down or even eliminate interest charges, potentially saving a lot of money while keeping your account active and positively affecting your credit score.
Missed and late monthly payments hurt your credit score. Plan to make your credit card payment on time each month to avoid fees and help build your credit score. You can even set up automatic payments so you don’t have to worry about missing a due date.
If automatic payments aren't possible, or a comfortable prospect, setting a payment reminder on your phone or in a calendar can also help.
Credit card companies give you lots of options when it comes to rewards and other credit card features.
Finding the right card is an important step in responsible credit card use. You want to choose a card that has a specific purpose.
Having a bunch of different credit cards and no plan for them is a good way to end up with credit card debt.
Common types of cards include:
You don’t have to get a regular credit card to build credit.
Today, there are lots of alternatives that give you the benefits of a credit card with a lot less risk, such as:
While it can be scary when you’re starting out, learning to use credit responsibly helps build good personal finance habits for a secure financial future.