Your credit score and your credit history have a significant impact on your financial life. This will affect whether you can get an apartment, what your mortgage rates are, whether you can buy a car, and whether you can get a personal loan. About 16% of Americans have bad credit (a FICO score between 300 and 579) while only 1.2% of Americans have a perfect credit score of 850.
Building credit can be difficult; However, if you are wondering how to use a credit card to build your balance, here are some answers.
How To Use A Credit Card To Build Your Balance
If you don’t already have a credit card, here are some great options to consider if you want to know how to build your credit card with a credit card:
- Secured credit card: With a secured credit card, the cardholder must transfer a refundable deposit to the issuer when the account is opened. This is a great option if you are just starting out using credit cards.
- Starter credit card: A starter credit card is intended for people who have limited or poor credit ratings.
- Student credit card: If you are a student, a student credit card can be a great option. They usually have lower credit limits, but you can benefit from fewer fees and possibly rewards for purchases.
- Become an authorized user: If you are under the age of 18 or have not been very lucky to open a credit card account, you can become an authorized user on someone else’s account.
Below are some tips on using a credit card to build your balance.
1. Set up automatic payments
Autopay is an easy way to ensure that you pay your credit card bill on time. Failure to make the minimum monthly payment on time could result in a late payment being recorded on your credit report. Your issuer can also charge interest for each day that you have a balance. Make sure that the bank account that the credit card is linked to always has enough funds to pay your credit card bill. Autopay is one of the easiest ways to streamline your finances and make payments on time.
2. Use it like a debit card
Think of your credit card as a debit card. Don’t go into debt just to improve your credit score, which can be counterproductive. Only use your credit card if you know you have the money to pay it off. Use your credit card to make everyday purchases like groceries, gasoline, and bills, then cash them out each month to build up your balance with your credit card.
3. Keep your balance low
Loan usage is an important factor in calculating your FICO credit score. Keep your total outstanding balance at 30% or less (ideally less than 10%) of your total credit limit. Exceeding 30% could affect your credit score. You can calculate your credit utilization either per card or in total as follows:
- Add up the balance on all cards
- Add the credit limits for all cards
- Divide the total amount by the total credit limit
- Multiply by 100 to see your percentage
4. Limit your requests for new credit
There are two types of queries on your credit report: soft queries and hard queries. Soft requests include verification of your own balance, verification by financial institutions, and verification of your file by credit card companies. These do not affect your creditworthiness. One tough query can hurt your creditworthiness for up to two years. The tough inquiries include applying for a new credit card, car loan, or mortgage. Multiple tough inquiries in a short period of time can affect your creditworthiness. Do not open multiple credit card accounts at the same time. If you have recently taken out a loan, try to avoid opening a new line of credit for a period of time.
5. Keep accounts open
The longer you keep your credit card and keep making payments on time, the more responsible you will be to reaching out to lenders. A common mistake people make is closing old credit card accounts. This could hurt your credit score. Closing accounts will lower the average age of your accounts and you will lose the available credit limit for that account. Find a card that meets all of your needs and keep it safe.
Continue to monitor your credit score
Keep track of all of your transactions and make sure you monitor your creditworthiness. Keeping an eye on your credit history can also help prevent fraud or identity theft. Use caution when getting into credit card debt to improve your credit score. The best way to use a credit card to build your balance is to use your card responsibly.