How to build credit with a credit card?
In this day and age, it is very important to build a credit and maintain that. Without a good credit score, you won’t be able to get a loan, a credit card or even an apartment.
Your credit score is measured mainly by how you have been with your past loans and credit card balance and it gives potential lenders an idea about how you will be with your future loans and credit card charges.
They will get an idea about whether you will pay your dues in time or not, and give you a loan or credit card only if their data says that you will be able to pay it back properly. So, keeping a good credit score mainly depends on your ability to pay back your loans and credit card charges in due time.
Although many financial advisers advice you to stop using a credit card entirely and pay only through cash to avoid over spending and keep a good credit score, which is certainly true, but under certain condition, using a credit card properly can help you build your credit score.
But the question is “how”?
See, credit score depends on your ability to repay your loans properly and in time. Now, if you don’t have any loans, your credit history is also blank. So, although you don’t have a bad credit score, your credit score is not actually building if you are not using your credit card and paying by cash only.
This will result in complications if you need to get a loan for some reason. The solution to this is to use a credit card, but use it strategically.
Here are a few tips to strategically use user credit card to build your credit score.
1. Avoid signing up for new credit cards
We have all been there. We saw a really irresistible bonus offers for signing up for a new credit card, and thought to ourselves, “what wrong can happen? I will sign up for the card, take the bonuses and then cancel it”. But it actually causes some problems, like putting negative impression in your credit score.
A major factor in calculating the credit score is the average age of your credit cards. If you get a new credit card every now and then, the average age gets reduced every time.
2. Limit your card number
Having multiple cards for multiple purposes may seem handy, but it helps to reduce your credit score in the long run. When you have multiple credit card, it reflects poorly on your credit report. Besides, you don’t actually need more than one card.
Yes, you may get discounts from different cards, but those discounts are offered because they know for a fact that majority of the people won’t pay the bill in time, resulting in a bigger overall payment with interests and stuff. Don’t get caught up.
3. Limit your credit
If you have more to spend, you will feel urge to spend it. And the problem with credit cards is that after buying something with a credit card, you don’t see your account getting smaller. It gets smaller at the end of the month.
And when your total bill gets out of control, it is a disaster. So, stay safe by limiting your credit beforehand, so that you don’t spend above the money that you can actually pay at the end of the month. You may contact your bank not to automatically increase your credit card limit and keep it constant.
4. Pay full at the end of each month
This seems obvious. But a lot of us don’t do that. As a result, we get a damaged credit score, and sometimes get buried in debt. We need to keep this simple principle in mind. Each and every month, we have to clear all our bills. Failing to do so will obviously seriously impact our credit score negatively.
5. Stick to your budget
You should have a budget planned according to your monthly income. Don’t get caught up with the notion of spending. I know, it can be tough, as you don’t have to pay up front, and “yeah, I will pay for the latest smartphone next month, let me have it now with the credit card”.
Don’t do it. Make your budget in a way that you never exceed your monthly income, and stick to it.
So, that’s it. With these principles in mind, you can go around and use your credit card while building your credit at the same time.
Just keep this in mind, you may pay your daily necessary bills and charges with your credit card, but don’t ever go outside your budget to buy anything with the card. And obviously, don’t forget to pay the bills fully at the end of the month.