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How to Use Credit Cards to Build Good Credit
Credit cards are one of the most important tools when it comes to building good credit. This resource will show how to make the most of your cards to improve your credit.
1. Pay on time
Paying on time is the most important factor that determines your credit score. Once an account has had at least one 30-day late payment, it is considered a derogatory account, remains on your credit report for 7 years, and factors negatively into your credit score. Here are a few tips:
- Try to pay your bill when it arrives in the mail. If this is not possible, at least you have some time to plan out how you will make the payment.
- Set a reminder a few days before the due date so you won’t forget.
- If you budget ahead and know there is enough money in your checking account, look into setting up automatic bill pay so you never miss a payment.
2. Keep it active
Use the card at least every 3-6 months so it will not be closed by the company due to inactivity. Often, card companies will not contact you before closing your account. You’ll want to keep it active so that your credit report reflects your good credit history. Closing a credit account can negatively impact your credit score. Keeping an “old” card active (one that has been open for 10 years or more) can increase your credit score.
3. Purchase something small
You can charge something as small as $1.00. Also, you can purchase a necessity (something you need to buy) that you would have purchased on a debit card or with cash.
Try to use only 30% of your credit limit. If that’s not possible, aim for 50%. For example, if your credit limit is $1,000 then only make purchases up to $300 each month on that card. Going over this amount impacts your “utilization ratio” and will lower your credit score. In other words, maxing out your credit card will drop your score in addition to causing you to pay extra fees on most cards.
4. Pay the balance off in full each month
Paying off your balance in full each month means not having to pay extra interest or fees on your purchases. If you never carry a balance to the next month, you never have to pay any interest or fees to the credit card company.
There is a myth that you need to carry a credit card balance to build good credit. This is not true! You can build good credit by paying off the balance in full each month.
Ask your coach for the resource “How to Pay Off Credit Card Debt” for best practices if you carry a balance on any of your cards.
5. Do not open a card for someone else’s use
This puts you on the hook for someone else’s use of credit. If they make late payments, go over the credit limit, or fail to pay off balances on time each month, it is reported on your credit report under your name. Also, you will be legally responsible if the lender takes legal action to recover an unpaid balance. This is true even if you are just a co-signer. A co-signer is fully responsible for the debt.