Whether or not you like the credit scoring industry, the fact of the matter is that your credit matters. And it’s about more than getting a good deal on a loan. Your credit history is used when others make all kinds of decisions about you, from what your insurance premium should be (in states that allow it) to what security deposit your landlord asks for. In some cases, an employer might even look at your credit report (but not your score) as part of a background check.
It may not seem fair that your credit history plays such a big role in your financial future, but that’s the way it is. And that means you need to get savvy about your use of credit — including your use of credit cards.
A Credit Card Can Be a Powerful Credit Building Tool
A recent Bankrate.com survey indicates that 63% of millennials don’t have a credit card. Instead, many millennials like using
cash and debit in order to keep track of spending and avoid debt. The problem with this approach is that your financial reputation in the future — and this affects whether or not you can get a mortgage at a reasonable rate and even what arrangement you get on your cell phone service — is based on your credit history. You need to use credit in order to build up that reputation.
A credit card is one of the fastest and easiest ways to build your credit reputation. Because your credit card information is reported to the credit reporting agencies every month, you have the chance to build up your report fast. Plus, good behaviors, such as paying on time, are reported as well as items like missed payments. If you make two or three purchases a month using your credit card, and then pay off the balance, you will quickly build a good credit history.
Credit cards are good at building your reputation for handling credit because they focus on the two biggest factors that determine your credit score: payment history and credit utilization. If you pay on time each month, you are already doing the single most important thing you can for your credit score. Payment history accounts for 35% of your credit score. The amount of credit you use, your credit utilization, is another 30% of your score. So, if you keep your balance low, and pay on time, you are already creating a positive impact on your credit history.
Opening a credit card account now can also help you establish a longer credit history, as well as show your ability to handle revolving credit. These are also important parts of your credit score.
The truth is that you need a credit file thick enough to be evaluated. Using a credit card can be one of the best and fastest ways to start generating usable data on your credit habits.
Be Smart About Credit Card Use
Using a credit card doesn’t have to be the fastrack to never-ending debt. The same sound money management principles that apply to cash and debit can also be applied to using credit cards. The key is in having a monthly spending plan or budget, and sticking with it, no matter what medium you use to pay.
One of the temptations of credit cards is to view the available balance as “extra” or “emergency” money. Instead, start from the standpoint of what you actually have in the bank. Don’t factor in your available credit. Look at what you have, and create a budget based on your income and expenses. Then, choose some regular and planned for expenses to pay for with your credit card. It’s essential that you only use your credit card within the confines of your established budget.
Make your purchases with the credit card, and then immediately pay off the balance. You can do this by arranging for payment online as soon as you get home from the store, if you want. Paying off the balance every month avoids late fees and a hike in your interest rate. The idea is that you don’t view your credit card as a way to make sudden and expensive purchases. Instead, it’s all about discipline, and only spending money you already have.
Over time, this strategy will benefit you. You’ll qualify for a mortgage when you’re ready to buy, and you will save thousands of dollars on home and car loans, as well as potentially save on insurance premiums and other financial services. As you pay off your balance in full each month, you avoid interest charges and late fees, you stay out of debt, and you build a good credit score that will allow you to get the best rates on all of your financial services in the future.
By Miranda Marquit, Staff Writer