Using credit cards to build credit can be a double-edged sword. On the one hand, credit cards are very useful. You can actually use them to your advantage and build your credit history and score very quickly. However, if you wield it poorly, you could really hurt your credit rating even more than you already know.
The most important thing to keep in mind when using credit cards to build credit effectively is your credit utilization ratio. Utilizing your cards correctly is a crucial part of the whole process. It is the percentage of available credit you are using versus the amount you are spending on credit each month. If you have poor credit utilization ratio, your credit rating will suffer. Basically, the lower your credit utilization ratio, the lower your credit score will be. A poor credit score will mean that lenders will not extend you credit.
Ideally, you want your credit cards to help you establish or rebuild your credit score as quickly as possible. By using credit cards to build credit score, you reduce the amount of time that you have to wait before building your score. This means faster loan approvals, more favorable interest rates, and generally better interest rates overall. This will save you money in the long run.
Another key thing to keep in mind when thinking about credit cards to build credit score is to only get one secured credit card and use it only for spending that is absolutely essential. For example, don’t get both a credit card with a low credit score and a high credit limit. You need to separate your spending between the two. This will also reduce your risk of falling into debt as well.
Of course, many people think that if they have multiple credit cards they can spread their debt out between them. While this may help to some extent, it will actually hurt you when you attempt to rebuild your credit score this way. By spreading your debt out across multiple cards, the credit bureaus do not have an accurate picture of your total debt. They are just guessing how much of the total you actually owe. This leads to an inaccurate picture of your actual score.
If you really want to know how to use credit cards to build credit score, the best strategy is to just start using it to pay off the smallest balances as soon as you can. Start by opening a new credit card and using just a little of it to pay off the smallest balance. As you continue to make payments, your credit score gradually climbs. This will happen even faster if you use credit cards to build credit and use it to pay off the larger loans.
Remember that credit cards are great to use when you need to rebuild credit. So long as you use them responsibly and consistently, your credit score will slowly improve. And when you get to the point where you need to apply for bigger loans, then you’ll be glad you used credit cards to build credit score.
The last thing to know about how to use credit cards to build credit score is the utilization ratio. The utilization ratio is the percentage of available credit card debt versus the total amount of available credit card debt. The lower the utilization ratio, the better credit score you’ll have. Ideally, it’s best to have a ratio at least 2.5. Anything higher than that may be an indication that you are over-relying on your credit card, which will lead to more problems down the road.