Using Credit Cards as a Credit-building Tool
Your FICO score no longer affects just your ability to buy a home, a car, or a house full of furniture. Now it affects your ability to purchase a cell phone, obtain satellite TV service, and even to buy car insurance at a reasonable rate. In addition, prospective employers and landlords are checking credit scores as a way of screening individuals.
Your credit card can help you build that high score – but only if you use it wisely.
If you’re just starting out you may qualify only for a very low line of credit. That’s OK, because you’re not going to use this credit card for any purpose except to build your credit scores and establish a solid financial reputation.
That means you’ll use it sparingly, and pay the entire balance each time a statement arrives. Preferably, on the day it arrives, so you don’t risk slow mail and a late arrival. Paying on line can also alleviate that problem – and if your paycheck won’t arrive for a day or two, most cards will allow you to schedule your payment for a later date. (Just remember to deduct the payment!)
While the rule of thumb has been to use no more than 30% of your available credit line, credit expert Emily Peters says that 10% is the way to the best score. So, if you begin your credit card use with a card limit of $500 – you should charge $50 or less each month. Or rather – in each statement period.
Remember that your cut-off date may or may not coincide with the calendar. Don’t charge again until you’ve paid the previous balance.
As you begin to shop for your new credit card, look over the offers carefully. Apply only for those that offer cards to individuals who hold scores similar to yours, because credit inquiries and rejections from “good credit – credit cards” will harm your scores.
If your scores are too low to qualify, then consider a secured credit card. Yes, this is in effect using your own money, but as long as you follow the guidelines set forth here, your credit will slowly build – enabling you to qualify for better and better cards as time passes.
Your new credit card should be a tool – as such, use it wisely and soon you’ll see credit scores that enable you to buy that home at the best possible rates.
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