Smart Credit Card Use Can Help You Build Good Credit
- Better Borrowing
- Frontwave Credit Union
Credit cards sometimes get a bad rep. And it’s true that people can get into serious debt if they use credit cards unwisely. But there’s nothing wrong credit cards themselves. In fact, they can be helpful tools to help you build good credit, especially when you’re first starting out — as long as you use them responsibly.
Why Good Credit Matters
Your credit, which is made up of your credit report and your credit score, is kind of like a financial report card. It’s what lenders use to decide whether to give you a loan and, if you’re approved, what interest rate you’ll receive. Information in your credit report can also affect what you pay for auto or home insurance, and may even be considered when you apply for a job.
Your credit is generally considered “good” when you have a history of making payments on time, your debt-to-income ratio is at a reasonable level and you’re not using too much of your available credit. The length of time you’ve held accounts can also impact your credit — generally the longer, the better.
It’s a good idea to check your credit report regularly to make sure everything listed on it is accurate. Sometimes mistakes do happen, such as a lender reporting a loan as delinquent when you actually received a payment deferral, or a collection account for someone with a similar name being incorrectly added to your report. You can get a free copy of your report from all 3 credit reporting agencies once a year by visiting annualcreditreport.com.
How Credit Cards Work
A credit card is a loan. Your card issuer approves you for a maximum loan amount you can spend, also known as your credit limit. When you make a purchase with your card, the amount you spend becomes part of your loan balance. Each month, you’re committed to paying this loan back by making at least the minimum payment.
Keep in mind:
- Interest is added to your bill every time you pay less than the full balance due.
- If you pay the balance in full each month, you can avoid paying interest.
- If nothing is owed, no payment is due.
The benefit of a credit card is that it gives you the flexibility to pay back purchases over time. It can also be helpful if an unexpected expense arises and you don’t have the funds you need readily available. Because it’s a revolving loan, it stays open until you or the lender requests to close it. That means you don’t have to reapply every time you need more funds, like you would with a personal loan from a bank or credit union.
Choosing the Right Card for YouCredit cards aren’t one-size-fits-all. They have different features and benefits for different people’s needs. For example, here at Frontwave, we have several credit card options:
- Visa® Classic — a solid card with no annual fee and low initial interest rate; good for folks just starting out
- Visa® Platinum — a premium card with higher credit limits and our best interest rate; for people with strong established credit
- Visa® Signature Rewards — a card that earns reward points with each purchase; good for folks who use their card frequently and want extra perks
Be sure to read the fine print of any card you’re considering before you sign on the dotted line. Pay close attention to the interest rate and any fees, as well as how interest owed is calculated.
Building Good Credit with Your Card
When you open a credit card, the issuer begins sending regular updates to one or more of the credit reporting agencies to let them know how much of your credit limit you’re using and whether you’re making payments on time. Over time, this builds up a credit history that other lenders will use to assess your financial fitness.
To build a good credit history with your credit card:
- Use your card regularly. Even if you don’t need to borrow money, put a few small purchases on the card each month and pay the balance off in full.
- Continue using the same card over an extended period of time. It’s better to stick with one card for a few years (or longer!), rather than hopping from new card to new card.
- Make all payments on time. Set up a notification on your calendar to remind you when your monthly payment is due. Or consider setting up automatic payments to lower the risk of a late or missed payment. If you’re in danger of missing a payment, contact your card issuer ahead of time to see if you can work something out.
- Keep your balance below your credit limit. Never “max out” your credit card. Whenever possible, try to use no more than 30% of your limit for any balance you carry over each month. If you have a credit limit of $5,000, for example, that means carrying a balance of no more than $1,500 from month to month.