Poor credit history can be a barrier to your financial life. It can deny you access to large loans, premium credit cards, low-interest loans, insurance, and also make it difficult to rent a house. It is for such reasons that you should work towards building a good credit score.
One of the most effective ways to build credit is to make use of credit cards. You probably don’t know, but it is one of the easiest methods to establish a good credit rating. Here is how to build credit with a credit card.
Clear Bills on Time
According to the terms set by the card provider, you are expected to make payments for the balance you have utilized each month. Honoring this agreement is considered a responsible use of the card, which then helps build your credit rating. How?
Credit card providers forward your credit report to credit bureaus. Therefore, each time you clear bills, they send a good report to the bureaus. The bureaus then use the information to calculate and come up with an improved credit score. In contrast, failure to pay balances forces providers to forward a bad report, which is then used to lower your credit score.
Thus, by choosing to clear credit card balances each month, you can easily build credit, which will then open up more opportunities.
Keep Utilization Rate Low
The utilization rate refers to the amount used each month compared to your credit limit.
Though having a larger limit is a good thing, using full credit is not advisable. Instead, you should focus on keeping your balance as low as possible. This is because credit card providers consider those that maximize on the limit of risk. Thus, over time, they might re-consider and reduce your credit limit.
Furthermore, credit bureaus use the utilization ratio to calculate your credit score. Therefore, utilizing less than the credit limit each month will increase your score. This will then play a crucial part in building your credit history.
If you are using the full credit limit each month, and are not struggling to clear the balance, then request for a limit increase. This will allow you to utilize less amount each month, which will then benefit your credit rating.
Maintain Old Credit Cards and Avoid Opening New Ones More Often
Maintaining old credit cards preserves your good credit history and also shows that you can be trusted. Old credit card accounts are useful when calculating your credit score since the system uses the average age of your accounts to come up with the rating.
You should avoid opening new credit cards within a short period because it results in a hard inquiry, which can lower your score over time. Furthermore, you are more likely to forget making payments on one of the cards when you have many, which will then hurt your score.
In summary, here is how to build credit with a credit card:
- Clear your credit card balances each month
- Always utilize less than your credit limit
- Maintain old credit card accounts and avoid opening new ones within a short period.
