When people think of credit cards, they often think of “debt” and forget that they are called “credit” cards. When used correctly, credit cards can actually help you build credit. However, the reason many cardholders accrue too much debt is that they are not using the system correctly. Keep reading to see how credit cards can help you build your credit.
How Is Credit Built
To understand how credit cards can be beneficial, you need to know how your credit score is determined. Whenever you make a positive payment on any of your accounts, including loans, credit cards and mortgages, this information is reported to the three major credit bureaus: TransUnion, Equifax and Experian. The three bureaus analyze your score in slightly different ways.
If you do not make on-time payments on your accounts, your score will go down. On the flip side, if you make positive payments, your score will go up. Other factors are considered when determining your score, but making timely payments is probably the most significant when building your credit.
Credit Cards Can Help You Build Credit
A credit score is essentially a way that banks measure how responsible and trustworthy you are with a line of credit, and credit cards provide you with a chance to prove yourself to lenders. Can you be trusted with $500? $5,000? $50,000? A financial institution does not know unless they see your credit score. The higher your score, the more likely a creditor will trust you with money.
Opening a credit card gives you access to a line of credit. If you handle it responsibly, this will increase your credit score, which will, in turn, alert creditors to the fact you can be trusted. This does not mean you will necessarily gain access to huge loans or credit cards with massive limits, but it will increase your chances, which can come in handy if you need to make a large purchase.
How to Build Credit with a Credit Card
To get the highest credit score possible, you need to use your credit cards regularly, as it will demonstrate that you can borrow money and pay it back on a regular basis. The best way to do this is to purchase items with your credit card when you can pay the balance in its entirety when your bill comes.
You can use credit cards for larger purchases, but you need to have a timeframe in mind for how long it will take you to repay the balance. While making positive payments increases your credit score, carrying large balances can hurt you. In fact, if you have borrowed more than 30% of your available credit line, your score may decrease. Thus, do not buy items you will pay back “eventually,” and do not rely on minimum payments. Making only the minimum payments will keep you in debt for years.
To build your score, use your card regularly, make purchases and then immediately pay them off. A long history of this behavior will increase your credit score, and you may be offered a credit limit increase. Since an increased credit limit will immediately lower your debt-to-available credit ratio, this will give your credit score another positive bump.
How Long Will It Take to Build Credit
Do not expect your credit score to change overnight. A payment you make today may not show up on your report for several months, which is why it is so important to start building credit immediately. While some creditors report changes every 30 days, others will wait until you have six months of positive payments before sending information to the credit bureaus. Unfortunately, there is nothing you can do to speed up the process. Just remember, your current efforts will positively influence your score in the future.
Final Tips for Building Credit
In addition to using a credit card responsibly, there are other things you can do to increase your credit score. Use a rent-to-own company to buy new furniture or electronics. Pay your utilities on time. Take out a personal loan to cover a home repair. As long as you make timely payments to a financial institution that reports to the three credit bureaus, you will improve your score.