Whether you are just starting out or you have veered off the path a little, know that the rumor is true – credit cards can be the path to a good credit score. We all know that a credit card is a great way to get into trouble, but, on the flip side, using a credit card can help you establish or improve your credit. This two-edged sword can swing the wrong way if you are not careful.
There are three credit bureaus that figure your scores and they all do it a little differently so your score can vary somewhat between the three. To assure that your score is a good one, let’s look at some of the basics you need to know to achieve a positive credit history.
- Make payments on time: This means ALL bills, credit cards, utility payments, student loans, etc.
- Stay within your credit limit: Don’t max out your limit. Your debt to credit ratio is a big factor in your score.
- Type of debt: Do you just have a store credit card? Maybe just a car loan? Well, most of us have a big mix of loans, a mortgage or rent, student loans, etc. All of this goes into the formula that equals your credit score.
- Recent Activity: If you have opened several accounts lately it may give the appearance that you are about to go off the deep end. Each time you apply for a new account (maybe to get that extra 10% off at the register) that inquiry is added to your credit report.
- Age matters: The age of your accounts, that is. The longer your account history, the more information that is available about your habits. This gives lenders a better picture of your stability.
If you have not yet established credit, don’t worry. Lenders also take other things into consideration, such as your job history and annual income information. But the main thing here is to get started.
Is a bad score really that bad?
You bet! It will cost you thousands in higher interest rates and cause delays in getting approvals. It can mean getting denied altogether. Believe it or not, it can even mean that a prospective employer can turn you down because you appear to be irresponsible or untrustworthy. I still can’t believe that an employer can have access to this information, but the reality is they can.
Now What? Okay, let’s say you’ve been at this a while and have dug yourself in a hole. You have poor credit and you have multiple cards, and just maybe, some or all are maxed out. You are determined to turn things around. What should you do?
- First, call to see if you are in a position to have your credit limit raised on your cards. It doesn’t cost anything to call (other than the normal frustration of being on hold all day) and you may be successful. This goes back to the debt to credit ratio mentioned earlier. Accomplishing this alone will improve your score. Remember, you are not raising this limit so you can spend more!
- Next, start paying down your balances. This can be a challenge but very rewarding, and a huge credit booster. There is a way to approach this goal so that you get the maximum benefit. As you pay them off, don’t close them. Just cut up the card. Closing an account has a negative impact on your credit.
Secured Card To The Rescue
If you have been turned down for a traditional credit card you might qualify for a secured credit card. This is a card marketed specifically for individuals with bad or limited credit. Using this type of card will help build and improve your credit score if used wisely.
How does a secured credit card work?
A secured card is basically secured by a “security deposit.” A deposit must be made in an FDIC insured savings account. This “security” deposit assures the card company they won’t lose out if you default. If you do default you will lose your deposit. Here are some things you should know about secured cards:
- Your credit limit will typically be 50% to 100% of the amount of your deposit depending on which card you go with.
- Pay on time and benefit. Pay late and pay dearly. You will pay a hefty late fee and suffer a reduced credit limit if you are late on your payments.
- Interest rates vary from card to card and typically the lower the interest rate, the higher the annual fee.
Unlike most prepaid credit cards, a secured credit card reports automatically to credit bureaus and your good and bad habits will be reflected in your score. This type of card is ideal for building credit. Depending on the card you choose, your deposit may be placed in an interest-bearing account. No one is getting much in the way of interest these days but what the heck, it’s still worth mentioning.
Some cards charge an application fee and processing fees. Fees can make a big difference so review them carefully.
Credit Card vs. Secured Card
A traditional credit card can be used to build credit for future purchases, experiences and proof of reliability and trustworthiness. It’s the world we live in. Starting off on the right foot and maintaining the basics of good credit habits will make life a little less stressful – at least in the financial realm.
A secured card is a great way for the person with no credit, limited credit, or bad credit to improve their position. The same basic principles apply in both situations. Whichever route you take, you can build great credit with the proper effort.
Photo Credit: FutUndBeidl via Flickr