Credit Cards Can Help Build Your Credit Score
If you have a bad credit score or perhaps no credit history, a credit card can be used to boost your credit score. But only if it is used properly and prudently.
Here is a guide explaining how to use credit cards to build your credit.
Traditional Credit Cards
Most traditional credit cards will help build your credit score. These are not prepaid debit cards. They involve credit lines that you get from an issuer with the requirement of paying back whatever you charge. Even cards that have rewards, such as airline miles or cash back cards, can help you build credit if used correctly.
Secured Credit Cards
If you cannot qualify for a traditional credit card, you may want to look into a secured credit card. This is a card where you provide the initial credit limit. Don’t confuse this with a prepaid card, where you load it up and then spend it like cash. With a secured card, you owe that money back like you would with a traditional credit card.
You can get your initial deposit back after canceling the account. It doesn’t disappear forever. While you use the card though, it acts just like money from the credit card company. In exchange for this, you get the benefit of having your credit card payments reported every month. You won’t get that out of a prepaid card. Yes, this will force you to shell out a little money, but since you are trying to build a positive credit history, it may be worth it to you.
How to Use Credit Cards to Build Credit
Once you have obtained a credit card that can build your credit, you need to use it in order to increase your score. Instead of paying for a transaction with cash, use your credit card instead.
Use your credit card for everything you pay for in a month–gas, rent, utilities, groceries, etc. You’d have to pay for those items anyway, so why not get a little credit out of doing so. Don’t charge something you don’t need or can’t afford to pay off at the end of the month. Keep track of what you’re spending. It is critically important to pay off the entire balance each month before the due date. You’ll build credit from doing this, and you may even squeeze some rewards out of your card.
Note that the credit card company will only make reports about your account once a month. It will take time for you to accrue enough payment history to build credit, but that is why it is important to start the process now. The sooner you get going with it, the better off you will be.
Credit Cards That Will Not Build Your Credit
Now that you know about credit cards that build your credit, you need to know about the opposite end of the spectrum.
Prepaid cards will not help you build credit because they act more like checks or cash. In addition, most do not report to the credit reporting agencies.
Inactive cards actually can help your credit score by lowering your debt to available balance ratio. In addition, the length of credit history plays a factor in your credit score, so keeping an account open for a long period of time is beneficial to your score. But an active account is more helpful. To keep an account active, make a small charge each month–buy a lunch on your card, as an example–and pay it off completely at the end of the month.