If you are like most Americans, you already have a credit card or are planning to get one. However, the way you handle your credit card will have a huge impact on your credit score. If your credit score drops, you will have higher interest rates on your loans. Or worse, you won’t qualify for loans at all.
That’s why we’ve prepared a guide that will help you learn how to use a credit card so that it increases your credit score. In the article, we will cover the following:
- The Right Way to Use a Credit Card
- How Many Credit Cards Should You Have to Get Good Credit?
- What’s the Best Way to Pay Off a Credit Card Balance?
- How to Choose a Credit Card
Keep reading to learn more!
The Comprehensive Guide on How to Use a Credit Card to Build Credit
If you do not use a credit card correctly, your credit score could drop. Therefore, we have some helpful tips that are sure to help you use your credit card in a way that will improve your credit score.
Firstly, try to use your debit card or cash whenever you can. Even small transactions on your credit card can add up, resulting in a large monthly payment. The more you use cash, the more likely you will be able to keep debt to a minimum and your credit score high.
Note: A good rule of thumb is to only use your credit card for things you need, not the things you want. In other words, if you go on a shopping spree, use your debit card; if your car needs maintenance, use your credit card.
Secondly, never miss a payment. At the end of every month, it’s important to at least make the minimum payment. If possible, pay off the entire balance. If you make a late payment or miss one, it can lower your credit score by 50-75 points! Consider setting up autopay if you tend to forget to make those monthly payments.
Lastly, never go over your credit card limit. If you spend even a penny over your limit, your score can drop by 40-50 points! This point difference is staggering, especially if you plan to buy a house or car soon.
Most Americans have three to four credit cards. However, depending on your circumstances, you may prefer to have more or less. So what are the pros and cons of having more than one credit card?
Pros of Having More Than One Credit Card
Keeping multiple credit cards allow you to spread outstanding balances. In effect, you’re less likely to reach your limit on one or more accounts. In other words, having more credit cards will give you leeway and flexibility. It’s usually a good idea to have a backup credit card in case your usual card is not accepted or is lost or stolen.
Moreover, different credit cards offer rewards. For example, one card may offer points for hotels or airline miles. Another card might give you cashback on groceries or gas. No one card will give you all the rewards, so having multiple cards might benefit you. However, don’t gravitate toward cards just because of their benefits. Consider whether you’ll use the credit card benefits or if they’re just a nice perk.
Cons of Having More Than One Credit Card
First, it’s not always easy to keep track of spending and payment due dates with multiple cards. For instance, it can be easy to forget how much you’ve spent on each credit card amount.
As mentioned, if you go past your limit, your score could be damaged. Likewise, if you lose track of the payment date, you may miss a payment deadline. The result is a damaged credit score! So if you have a hard time sticking to budgets or juggling too many due dates, acquiring multiple credit cards may not be for you.
In the end, try to keep your credit utilization ratio to 30% or less. In other words, if you are spending more than 30% of your total available credit on each card, you have a greater risk of damaging your credit score.
Note: It’s usually not a good idea to have store credit cards. For one, they increase the temptation to go on more shopping sprees. Moreover, store credit cards also decrease the age of your overall credit history, ultimately lowering your score. The high-interest rates are simply not worth it.
So, How Many Cards Should You Have?
The answer depends on your circumstances. However, as long as you make payments on time and don’t pass your limit, your score shouldn’t be negatively affected.
When learning about how to use a credit card, it’s important to know the types of repayment methods. Basically, there are a few strategic ways to pay off your credit card balances. Listed below are two techniques to successfully pay off a credit card balance:
- The Snowball Method. It involves paying off the smallest balances first. After it’s paid off, you move to the next highest balance. If you have a lot of debt on different credit cards, this method may work best.
- The Avalanche Method. With this method, you pay off the debt with the highest interest rate first. If you have high interest accruing on certain accounts, this method may work best.
As you start making these payments, it’s always best to pay more than the minimum whenever possible. Why?
When you pay more than the minimum, you decrease the amount of interest you pay over time and pay off your debt sooner. Moreover, your credit score can drastically improve as you pay off your debt. Lastly, having little to no credit card debt makes it easier to make large purchases, such as buying a home or car.
Before deciding on a card, check to see if there are annual fees, what the APR amounts to, if the card is accepted at your list of frequently shopped stores, and how the benefits measure up to the costs of the credit card. Why? You need to learn how to use a credit card that you plan on using.
Cards with Perks
As noted, some credit cards offer rewards or extra perks. While this might be a great benefit for some, it’s important to ask yourself whether or not you plan to actually use those benefits.
Spending hundreds each month to collect a reduced airfare or a free concert ticket once in a blue moon may not make sense for your budget. Do your research and don’t let a credit card’s marketing ploy win you over.
Credit Cards with an Annual Fee
If it sounds too good to be true, it probably it! Cards that have amazing rewards, low-interest rates, and superior payment options likely has an annual fee.
Should you get a credit card with an annual fee?
When you’re looking at a credit card with an annual fee, take a look at what benefits they offer and compare the cost to what you’ll get. Is the annual fee too high for what you’ll be getting? If so, that credit card might not be worth it. Ask yourself if you will actually use those benefits, if there are any hidden fees, or if there are better deals out there.
Credit Cards from Unions
Banks aren’t the only institutions that offer credit cards. If you’re not having much luck getting approved for one, consider credit union credit cards. They offer more chances to get a credit card that can potentially make it easier for you.
Should you get a union credit card?
Credit unions are member-owned nonprofits. As a result, when you get a union credit card, you generally get a more personalized experience. Additionally, credit unions offer low-interest rates and flexible repayment methods.
Nonetheless, there are a few things that you should scrutinize. Credit union has specific entry requirements. When you join a credit union, all your accounts are tied together. And, credit unions are easily affected by local problems in the community.
In the end, the type of credit card and where you get it depends on your unique situation.
Need to Repair Your Credit?
Now that you know all about how to use a credit card, it’s important to note that it’s are a great tool for preparing yourself for greater investments down the road, like purchasing a car or house. Nonetheless, if used irresponsibly, it can harm your future buying power.
If your credit score isn’t where it should be because of credit cards, contact Go Clean Credit. Go Clean Credit is a top credit repair company in Arizona that is passionate about getting you on the road to success. Over the last 15+ years, this credit repair company has helped thousands of people reach their financial goals.
Contact Go Clean Credit today to learn more about how they can personally help you!