Building credit with credit cards.Credit is one of the most frustrating financial topics to me. It’s really a conundrum. You don’t necessarily have to have credit. But it sure makes life a lot easier. Without it it is difficult to rent an apartment, pay low car insurance rates, get a loan, get a mortgage, etc. And even worse, if you have bad credit, it can be even more difficult to do any of those things.
So if you are struggling with either no credit or bad credit, let me help you. The fastest (but not necessarily the most responsible way for some people) to build credit is to do it with credit cards. Let me show you how you can go about building credit with credit cards.
(1) Credit Utilization
The most important aspect about credit cards is your credit utilization rate. This is simply the amount of credit that you have in comparison to the amount of credit you are using.
For example, if you have one credit card with a $1,000 limit and you have $600 on that credit card, you have a 60% credit card utilization.
If you have two credit cards, each with a $1,000 limit ($2,000 in total), and you have $600 on those credit cards combined, you have a 30% utilization rate.
The best way in building your credit with credit cards is to keep that utilization rate low. You ALWAYS want to be below 30%. Even more than that you should strive for less than 10% utilization. And even more than that, you should not carry a balance at all. That means your utilization rate would be 0%.
And as I have said many times before, if you are consistently carrying a balance on your credit card, you are not financially responsible enough to have one and you should stop using it altogether. Tough love, I know.
(2) On-Time Payments
The second way that you can begin building credit with credit cards is to make your payments on time. This seems like a no-brainer but most people don’t understand how even one late payment can hurt your credit score.
Each late payment stays on your credit report for 7 years! One 30-day late payment isn’t the end of the world. A 60-day late payment hurts pretty bad though. And a 90-day late payment is really rough on your credit score.
Just make sure that when you spend money on your credit card, you have enough money to cover the purchase RIGHT THEN and you should avoid late payments.
(3) Credit Length
The last major way to begin building credit with credit cards is by the length of time that you have had those credit cards open.
The only way that you can improve this is simply by keeping the credit cards open and not closing them.
Ideally, you want your average credit length of all of your credit accounts to be 7+ years. I know that this is not always possible, especially if you are young. But over time it will get better.
If you are thinking about closing a credit card for one reason or another, think twice about closing the card that you have had for 15-20 years or so and close the one that you have had open for 2 years.
Final Thoughts
Credit can be a mess to think about or deal with. But sadly, it is a very normal part of our society and we have to get used to it.
Just remember, pay your bills on time, pay your credit cards off each month, and over time your credit length will grow.
You can do this!
I am here to help you!
Until next time!
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