Do you know how to use a credit card to build your credit?
Believe it or not, using a credit card is one way to help create credit history and get into the mindset of being financially responsible.
Credit cards are convenient to use but many people are scared to use them because it is so easy to overspend when you make purchases.
A credit card is a powerful tool but it’s not a free pass to spend more than you can afford. It’s a harsh mistake many people make time and again.
If you use your card responsibly, it can actually improve your poor credit score!
In this article, we’ll look at some ways you can use a credit card account wisely to raise your credit score without getting into debt.
Using A Credit Card
Do you know how credit cards work?
A credit card can be confusing if you haven’t had one before- getting one before college was a big deal for me.
If you’ve never had a credit card account, your first instinct may be to avoid getting one altogether. But if you do the work, a credit card can help rather than hinder your finances.
There are some benefits to using one responsibly!
It can give your credit score a nice boost in just a couple of months. Using one is an easy way to start building good habits and get into the mindset of being financially responsible.
When To Use Your Credit Card
Credit cards are a somewhat misunderstood financial tool. Not many people know why credit scores are important or why you need good credit.
Use it correctly, and you’ll discover that it’s a helpful financial tool that can help you build your credit score and gain financial freedom.
Here are some of the most common reasons for using one:
Extra protection on purchases online. When you use debit cards, the money is automatically taken from your bank account and it could be a while to get it back after you report the fraud.
To pay for an emergency expense. If you unexpectedly face an expensive repair bill, such as a broken window or new tire, and don’t have enough in savings to pay for it in full, using your card can sometimes be quicker than withdrawing money from your emergency fund.
Make a big purchase that you may have to return. Don’t use it unless you can pay off the full balance when it’s due! Most credit card processors come with return protection which is a free service that adds more time to the retailer’s return policy.
For recurring monthly payments. Set up your utility bill, Amazon Prime, Netflix, gym memberships on a credit card. It’s a convenient way to pay for something that you are going to use often. Plus, by setting it up on a recurring payment the payment will always be on time.
To earn rewards. Some credit cards offer point rewards or cash back on purchases. The rates vary but if you are a frequent shopper who makes large purchases, it could make sense to use a credit card to earn rewards.
When NOT To Use Your Card
The best thing you can do is make sure not to go overboard with your spending when using a credit card. Try not to charge over 30% of the credit limit.
When you overuse your card, it puts a strain on your cash and you. Here are some times when you shouldn’t use it.
No self-control on spending. If you have a hard time resisting the temptation to spend more than what’s in your budget, then it’s best not to use credit cards at all. Saving money is more important than spending it all!
Can’t afford to pay off cards or make payments. If you don’t have the cash to pay your balance or can’t afford to make payments, then it’s best not to charge any purchases on your card. If you do, you could get buried in debt and ultimately hurt your credit score.
Just to take advantage of interest-free credit card promotional offers. Using interest-free credit cards for their promotion is not worth it most of the time, as very few people actually pay off their balance after the original promo period is over.
How To Use A Credit Card
Most people who are looking at how to get better credit use their cards for making everyday purchases. to save money on groceries and more. But here’s how to properly use your card!
1. Read Your Bill
Each month you receive a statement or bill from the credit card company. Read your bill carefully.
There are some things you want to pay close attention to:
- The total credit card balance
- Available credit limit
- Purchases made in this billing cycle
- Payment due date
- Minimum amount due
Check each transaction on the statement for accuracy. If you see a charge you didn’t make, contact them right away and dispute the charge.
It is very tempting to only pay the minimum balance each month. You quickly will change your mind when you look at the section that tells you how long it will take to pay off the card if you just pay the minimum amount due.
Avoid interest charges by paying in full each month instead of making payments. Each credit card has a grace period. After this grace period is over, you will be charged interest on the unpaid balance from the date of purchase. The grace period on most cards is usually 20 to 30 days.
It’s also important to note the due date of your payment on your calendar so you don’t forget. Missing any payments can lead to late fees and even lower credit scores if it continues for an extended period.
Savvy Tip: Keep a separate register for purchases made with your credit cards to compare back to the statements. Write down the date, place of purchase, the amount spent, and the balance of the card after the purchase is made.
2. Pay Bills On Time (Or Early!)
The easiest way to maintain a good score is by paying your credit card bills on time and the balance in full. This way you avoid interest charges (always know your interest rates folks!) when you pay your bill monthly.
Credit card companies report whether payments are made on time or late to the credit bureaus. The best thing to do is to pay the payment online.
You can set up an automatic payment schedule to make sure that the payments are made on time each month. A late fee (usually around $39) will be charged to your account if the payment arrives late.
3. Pay Over The Minimum
If you can’t pay in full, aim to pay more than the minimum payment you owe. For example, try paying the minimum payment plus the amount of interest that was charged for using the card.
This will reduce the amount of interest you pay over time.
Savvy Tip: Set up reminders on your calendar for paying cards include the amount of the minimum payment, especially if you are struggling with negative information like late payments or collections.
4. Avoid Credit Card Fees
There are a lot of fees that can be charged. Become familiar with the fees your credit card company may charge you by reading the Credit Agreement either in the statement or online.
Some of the fees you may see are:
- Balance transfer fees
- Cash advance fees
- Annual fees
- Late payment fees
- Returned payment fees
- Foreign Transaction fees
Many credit cards are available that do not charge an annual fee or a foreign transaction fee. If you decide to apply for a card that does charge these fees, consider if they are worth it to you.
5. Check Your Monthly Balance
Every month, you should check your credit card balance. You want to make sure your credit utilization ratio is as low as possible. The credit utilization ratio is the quotient of your credit card account balance divided by the length of your credit line.
If you have a $1,000 credit limit but currently owe $500 on it, your utilization ratio is 50%. Your credit usage ratio should be below 30% of the total amount of credit limit available to you.
The amount of outstanding credit lines you have is a factor in your credit score. The lower the ratio, the better. Credit card companies and lenders prefer ratios around 20% for this purpose.
Someone who uses credit cards and maxes them out is viewed as a high-risk borrower by lenders. If this happens, it’s probably a good time to start doing what you can to repair your credit.
6. Aim For Cash Back & Rewards
Whether you’re new to using credit cards or not, you’re probably no stranger to looking for ways to save money– but what about getting money back on what you’ve spent?
Consider a credit card that offers perks if you use it like rewards credit cards where you earn cash back or airline miles, by using them. Getting cash back is one of our top frugal living tips to become financially independent!
You also want to research and pick the best credit card for your situation– don’t just signup for one at random!
7. Watch Your Credit Score
Credit card companies must report your credit history correctly. The reason is that your credit history can impact your life in a lot of ways so you want to have a high credit score.
You may not know that there are companies that use your credit score to evaluate how much you pay for insurance, the interest rate on your mortgage, and the cost of other financial obligations.
Before applying for any type of loan (e.g., student loan, personal loan, home equity line of credit), be sure to check your score. Credit Karma is a credit monitoring site that will allow you to check your credit score for free every month.
Reading Your Credit Card Agreement
While reading the agreement is not something you look forward to doing, it’s important to do. Here are some of the most important terms in your agreement that each user should know about:
1. Annual Percentage Rate (APR)
The APR (Annual Percentage Rate) is perhaps the most important term to know. It is the interest rate on the unpaid balances on your card and is charged to you when you carry a balance from one month’s statement period to another.
2. Grace Period
It is the number of days you have to make a payment on your card before being charged interest.
3. Intro APR
Intro APR is a promotional period in which you may benefit from a low or 0% introductory APR for a certain number of months from when your account is opened.
4. Balance transfers
Balance transfers are transactions where you transfer all or a portion of the outstanding card balance from another credit card issuer to your issuer in exchange for a lower interest rate or waived fees.
5. Late Fees
Late fees are what you will need to pay if your payment is not submitted on time by the due date listed on your statement. Late fees can be as high as $39 per missed payment, so make sure to submit your payments before the due date.
Maintaining Good Credit
Now that you know the basics, here are some tips to help you maintain a good credit history:
- Be sure to pay your credit card bill on time and in full each month. This is one of the most important things you can do to help you build credit because it demonstrates responsibility with money management.
- Don’t use more than 30% of your available credit. If your card limit is $1,000 and you have used up at least $300 of it, this means that you are using 30% of your available credit.
- Find and apply for a card that matches your credit score. If you have excellent credit, look for a card with an APR as low as possible and rewards that match up to the amount you spend.
Avoiding Large Debts/Bills
One of the biggest mistakes people make with credit cards is spending more than they can afford. You need to pay off your credit card debt to move on strongly, and we can help you do it.
As stated above, if you spend more than 30% of your available credit on a regular basis or have neglected to pay the balance in full for 3 months, this will negatively impact your score.
Try not to spend large amounts on items. It is tempting to buy that $800 television and pay it off over two years. This is basically taking a personal loan from the credit card company and you will end up paying a lot more interest on that television.
Never use your credit card if you cannot afford to pay it in full at the end of each month. It is much better to save up and purchase items.
If you’re looking for a way to build credit and avoid going into debt, it might be time to think about using your credit card. Sounds a little ridiculous, doesn’t it?
There are many ways to use your card in order to maintain good or excellent credit. It is important for your financial health and future that you make it a point to pay off any outstanding balances on time.
But with the right balance of responsibility and mindful spending, you can use your cards responsibly and start building up that score!