Whether you are debating about purchasing a new vehicle or want to refinance your mortgage, having a strong credit score can you give you access to capital (money) to borrow at an affordable rate. However, for many Americans, a good credit score can be challenging to build.
If you have been hit with a family or medical emergency, you may have dinged your credit more than you expected. However, know that credit scores can always change, and the more proactive you become in building good credit, the quicker your credit score will rise.
The easiest and most accessible way to build good credit is by using a credit card. Even if a credit card is what brought your credit score down in the first place, it’s also the best chance you have of increasing your credit. Although you can rebuild your credit using loans, you may not have access to a loan at an affordable interest rate. Credit cards offer an inexpensive way to boost your credit.
Here are some top tips on how you can use credit cards to rebuild your credit:
Do Your Research on Credit Cards
Being vigilant about your credit cards should be the first action you take. Don’t be afraid to shop around to find the best credit card with the lowest interest rate. If you are looking just to build credit and you are afraid you might overspend on your card, see if you can find and apply for a credit card with a low limit ($1,000 and under).
However, if applying, be sure to only apply to a few cards. Applying for a line of credit multiple times can ding your credit score. If you want to see some of the latest credit cards that boost credit, click here.
Treat Your Credit Card Like a Debit Card
Having access to a credit card can be scary for some. In the past, you may have used your credit card for unnecessary purchases that started to add up once your bill was due. The best way to conquer this is by gaining the mentality to treat your credit card like a debit card. Only use your credit card for necessities such as groceries and gas. Before each purchase, think to yourself “Would I have enough money to pay this if I was using a debit card?”.
Pay Your Bills On Time and in Full
There is no question that payment history is the single largest factor that affects your credit scores. 35% of your FICO score is based on your payment history. Your debts won’t simply just “go away” at the end of the month, especially the interest that gets tacked on. As a responsible consumer, you must pay your monthly statements on time.
This goes back to point #2 about treating your credit card like a debit card. Another strategy you can implement is to make weekly or even daily payments on your credit card to keep yourself in check.
Don’t Overuse Your Credit Card
After payment history, the second most important factor in your credit score is amounts owed, which accounts for 30% of your credit score. This is commonly referred to as “Credit Utilization” by the 3 major credit bureaus: Experian, Equifax, and TransUnion.
As a general rule, it’s best to utilize up to 30% of your credit limit. So if you have a monthly limit of $1,000 on your credit card, use only up to $300 a month. If you want to see a list of credit cards with generous credit limits, you can see them here.
Overall, the longer track record and credit history you have, the more predictable you are to the 3 credit bureaus and lenders. Your FICO score factors in how long your credit cards have been open for and how long you have had certain credit accounts. Canceling cards left and right will raise a red flag, so if you do wish to cancel your card, do them in 3-month intervals.
Rebuilding your credit is exciting and also gives you a sense of pride. Being responsible with your credit cards will give you more financial freedom and take a huge weight off your back in the long run. There is no question that using a credit card is the fastest way to boost your credit score.
Credit cards are actually one of the most effective and efficient ways of increasing your credit score. By taking the time to understand how credit cards work, you can use them to your advantage.