Credit cards are a useful tool so long as you know how to use them. They make it just as easy to build good credit as they do to build bad credit. And your credit, good or bad, will affect whether you’re able to afford a home or rent an apartment. It can affect the percentage of interest you pay and your ability to get a loan. If you haven’t thought about your credit report before, now might be the time to start. GOBankingRates asked the experts, and these are their tips for using your credit to establish good credit.
1. Keep Your Balance Low
In order to build credit, you have to use credit. But you never want to spend more than you can afford and end up carrying a balance from month to month. That’s how you end up paying more interest in the long run. Instead, “make a few purchases each month, then pay off the balance in full before interest begins to accrue,” suggested Amy Maliga, a financial educator with Take Charge America.
According to Levon Galstyan, a Certified Public Accountant at Oak View Law Group, “Your FICO score includes 30% of your available credit. Utilizing more than 30% of your available credit could harm your rating.” Ideally, you’d keep your utilization below 10%, but as long as you’re below 30%, your credit will remain in good standing.
2. Make On-Time Payments
Head of Credit Cards and Unsecured Leading at TD Bank, Christopher Fred says making on-time payments, even if it’s just the minimum, is essential for building credit. It shows lenders that you are responsible in repaying what you owe. Keep in mind that different lenders have their own criteria for assessing creditworthiness. Nonetheless, late or missed payments can lower your credit score. Late payments can have various consequences depending on your credit card terms, such as paying late fees, additional interest, and losing access to your credit line. In some cases, long overdue payments can even be reported to credit agencies.
Fred recommends “setting a monthly reminder on your phone or work calendar” to avoid missing any important due dates.
3. Monitor Your Credit
Once you start making purchases and establishing credit, you should also start paying closer attention to your bank statements and your credit score. Doing this allows you to catch any fraudulent activity before it gets out of your hands. Keep an eye out for suspicious activity or unfamiliar accounts in your credit report. “The credit bureaus use the information from credit reports to develop credit scores, so it is important that the information appearing on the reports is accurate,” said Freddie Huynh, VP of data optimization with Freedom Debt Relief.
Each of the 3 credit bureaus allows you to access your credit report once a year for free. If your report has any errors, follow the instructions on the website to get the report corrected.
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Maria Concepcion contributed to the reporting for this article.