Using credit cards can be one of the best things you do for yourself – IF, yes, I said IF you can use it correctly and to your advantage. Credit cards are one of the best ways to help build credit and show that you are credit worthy. If you don’t use it responsibly, it is a sure way to kill your credit which can be a hard hole to dig yourself out of.
So, you want to show your credit worthiness… what does that mean? Well, basically you want potential lenders to know that you have responsibly handled credit and debt in the past which they do by looking at your credit score. Your credit score is that magic number that tells a lender how likely you are to repay your debt. The higher the score the more credit worthy you are. The more credit worthy you are the more likely you are to get accepted for credit at lower rates.
So, how do you make sure that you use your credit card correctly so that you can make it work for you? There are a few ways which I will explain below.
Pay it off every month – the whole balance
You want to use your credit card like it is cash. You can not charge more on your credit card than you have in your bank account. When your credit card is due, you never pay the minimum balance, you ALWAYS pay either the entire statement balance or the current balance. Doing this will build your credit while avoiding interest which costs you money.
Always pay on time
Not only will you be charged a hefty fee for paying past the due date, but you will also get a big ding on your credit score. So, set up automatic payment on your credit card long before the first payment is due. Payment history has the most weight in your credit score, so I can’t stress enough how imperative this is.
Don’t spend more than 30% of your limit
You want to keep your credit utilization low in order to maintain a high credit score, so you want to aim to use as little of your credit as possible. This shouldn’t be too hard if you are paying off your balance every month, but you do want to try to avoid going over 30% of your limit.
Increase your limit
Over time as you consistently pay off your balance on time each month, you can ask creditors to increase your limit. When you do this your debt to credit ratio will be lower which will increase your credit score. The key here is to make sure you don’t spend more because of the higher limit.
Keep a budget
Having a budget is the best way to keep track of where your money is and where it is going. When you have a plan for your money, you will make sure that you don’t use your credit card for things that you can’t afford. You want to make a budget, use your credit card for the spending of items in your budget, and don’t spend more.
These 2 posts will help explain more about budgeting. I also have a free budget template and free budget printable here.
Log into your account
You wan to make sure you are actually logging into your account and keeping tabs on what you are spending. I would recommend doing this about once a week. This will help you to make sure that you are sticking to your budget and not frivolously spending. Also, it can help spot fraudulent activity.
By doing these things, you will make sure that you are responsible with your credit card and that you use it to work for you. One of the other benefits of credit cards is that you can earn rewards. So no only will your credit card be helping you with your credit score, but they will also be paying you!
If your next step is to look at a new card, but you are wondering how you are going to meet the spending limit to get the bonuses without going over budget, read this post!