Most of us understand that credit is a vital part of our financial lives. Our creditworthiness can have an impact on everything from our ability to get a job, own a home, and everything in between. Using credit wisely is a key tool when it comes to building credit. Many people find themselves in two different positions. As a younger person, you may not have credit and maybe trying to establish credit. Conversely, you may have made credit mistakes and find yourself having to nurse your handicapped credit back to good health. Fortunately, there are a wide variety of different types of credit cards that make this possible.
Use Credit Cards to Build Your Credit
Credit cards allow us to acquire things without having to pay for them outright. That $600 flat screen can be purchased instantly and loaded into your trunk without you having to touch a dime of your actual money right away. You are allowed to enjoy your purchase and pay for it over time or at a later date when it’s more convenient for you.
In addition to being able to pay for things using the bank’s money initially, the more you handle your credit responsibly, the more of it you have access to. This means that if you are approved for a credit card with an initial thousand dollar limit and you honor the terms of the card, in as little as six months your credit limit might be increased two or three-fold. The benefits of using credit properly don’t stop there, however. Using credit responsibly also grows your credit score, showing the financial world that you’re a worthy risk for bigger purchases, like a home or a car. Credit can be a financially beneficial tool if it’s handled properly.
Before You Start Your Credit Card Hunt…
Before you apply for any credit card you should start by pulling your credit report from all three credit reporting agencies and going over it with a fine-tooth comb. If there are mistakes, you need to challenge or dispute them. It’s necessary to make sure that your credit report is accurate before you start your credit hunt. To improve your credit, you must first understand where you are in the credit game and what’s on your credit. Understand that several keys go into determining your creditworthiness and they include payment history, amounts owed, length of credit history, as well as other variables.
Five Power Moves for Building or Rebuilding Credit
The path to rebuilding or building credit must be paved and lit using the correct information and knowing the best types of credit cards for your unique situation.
Review Your Credit Report
Check your credit report and make sure it’s accurate. You need to know what creditors have or haven’t reported about your credit usage habits. Moreover, you need to verify that what has been reported is accurate. If it’s not, take steps to dispute or challenge the inaccuracies.
Get a Good Credit Card
Secondly, GET A CREDIT CARD. Using credit is essential to building credit or rebuilding it. You will need to do your homework to determine which credit card is best for you if your aim is building credit. You can start by considering credit card companies below. These companies are reputable and trustworthy, and remember, Loanry is the best place you can go to for anything finance-related, including credit cards. So thank you for coming here, and we hope you’ll find the right credit card for you.
Pay Your Bills on Time
Third, pay your credit card bill on time. Part of creditworthiness is honoring the terms of your credit agreement. This includes paying your credit cards by the due date
Use Your Credit Carefully
Fourth, manage your credit utilization. In other words, don’t max out your credit cards. Credit card companies look at the amount of debt you have on all of your lines of revolving credit. This is the second most important factor when it comes to your creditworthiness. This is important because credit card companies don’t have access to your income information. Instead, they make decisions based upon how much of your credit you have used. For example, you may have three credit cards and each card has a $2,000 limit and all three have a used balance of at least $1,700. To creditors, your credit utilization is almost completely exhausted. This reflects poorly on your credit, particularly if you are seeking more. It may appear that you can’t truly afford the credit you do have and you’re using credit cards improperly.
Get to Know The Risk Factors
Last but not least, get acquainted with your risk factors. This may require spending a little money. You can pull your credit report but it won’t give you your credit score. What you need to know is your score and the negative factors that are affecting it. You can get a peek at your risk factors by paying for a full credit report. All three credit reporting agencies offer this as well as a report that delves into your credit risk factors. Your credit risk is evaluated by credit reporting agencies that consider over 300 risk factors.
To proactively build your credit, you need to know your risk factors. The details of these risk factors can function as a road map or guide, showing you areas of improvement and what you can do. This report might reveal a particular account that is adversely affecting your credit score.
Conversely, things you don’t have can be a risk factor as well. For example, not being a homeowner could be a risk factor in some situations. However, there may be other ways that you can tilt the credit odds in your favor.
The Downfall of Mishandled Credit
Conversely, if you’re someone that has handled credit negligently, you’ll find many doors closing for you. You may receive credit card offers but the interest rate for your credit card may be significantly higher. Depending on how bad your credit is, you may not be able to require a conventional credit card as well. You may be limited to secured credit cards to help rebuild or re-establish your credit until you can prove that you can handle credit responsibly.
Secured credit card requires you to pay a certain amount of deposit and in turn, you are given credit equal to your deposit typically. The interest rates may be high on a secured credit card as well. It should also be noted that certain types of credit cards may not be available to someone with poor credit. For example, you may not receive credit card offers for balance transfers or with low or zero percent interest rates. For all practical purposes, you are considered a credit risk and most banks will handle you cautiously, requiring you to prove yourself by honoring your credit terms over time, before extending more credit or offering you better interest rates. However, if you can get a credit card, you have a fighting chance, no-a good chance of building credit if you make your payments on time and honor the terms of your credit card.
The Yellow Brick Road to Credit Worthiness
Once you’ve chosen to conquer your poor credit or lack of credit, you need to look for a simple credit card that will allow you to achieve this without too much effort. In other words, you need to look for a credit card that will allow you to do this pretty easily. However, the type of credit card you pursue should be largely based on your unique situation.
Those That Have Little or No Credit
If you are someone that doesn’t have much credit, choosing the right card and getting approved for it can seem a bit daunting. However, there are credit cards geared to people with low or no credit. For example, if you are a college student who’s never had a credit card or any type of credit before, many credit card companies have starter credit cards for people new to credit. Many of these cards offer perks that people with established credit enjoy. For example, zero percent introductory fees and cashback on purchases. Cards with zero percent annual percentage interest rates help new credit card users save on the amount of interest they will be paying as time passes. Also, there are a whole host of other perks and benefits that credit card companies may offer to beginner credit card users.
Conversely, it’s safe to say that you won’t have credit card offers pouring from the sky when you have little to no credit. There is a chance that you might have to start with a secured card to initially establish your credit. You may even consider joining a credit union and attempting to get a credit card through your credit union.
Regardless of Your No Credit, Poor Credit Do This…
Regardless of whether you have no credit or poor credit, you mustn’t waste your time applying for credit cards that aren’t a good fit. This is one of the main reasons why you need to develop both a fundamental and intimate understanding of your unique credit situation. Your credit report provides this information and you must pull all three. They won’t all have the same information and your credit score can vary from one credit reporting agency to the next.
However, the idea is to know for sure what’s on your credit report so that you know which credit cards will be best for you. Every time you apply for credit it creates an inquiry. If you are denied it can reflect negatively on your credit. This is why you need to make educated and practical choices when you apply for a credit card by applying for cards with good approval rated for people with your credit situation. You can’t do this unless you know what you’re working with.
Essentially, know your credit score as well as what’s on your credit. This will help you make good decisions when it comes to applying for credit cards that you have a good chance of approval. In essence, only apply for credit cards with good approval odds. In other words, if you have a credit score of 550, that Platinum Visa is probably not for you and you probably won’t be approved. However, you may qualify for that secured credit card offer that just came in the mail. Also, it’s not a good idea to apply for a lot of credit cards at once if your goal is to start building credit. Be conservative and apply for cards you know you have a good chance of getting. This is honestly the best credit card shopping trick.
Secured Credit Cards to Build Credit
These types of credit cards are honestly good for a wide variety of people for many different reasons. Your creditworthiness is not usually on trial with these types of cards. People with little or no credit as well as poor credit can use secured credit cards if they are unable to qualify for conventional credit. Consider a secured credit card a starter credit card. Secured credit cards require you to make a deposit equal to the amount of credit you are seeking. More often than not, secured credit cards are dressed down versions of traditional credit cards. They don’t usually offer too many perks and your interest rates may still be high.
These types of credit cards usually don’t offer perks like cash back, sky milers, or rewards. However, these credit cards do give people with no credit or poor credit an opportunity to rebuild or establish a good credit history. Making payments on time and not maxing out the credit card usually reflect positively on credit history. And can lead to an increase in your credit limit and more credit card offers once you have a history of making payments on time.
The Nuts and Bolts of Secured Credit
Secured credit cards usually offer automatic approval without a credit check, although some may require approval and may even consider your credit. Some may even require you to have a checking account. When you apply for a secured credit card you submit your deposit along with your application. Your credit limit is usually equal to your deposit. Some cards may return your deposit after a certain amount of time has passed and you’ve made on-time payments.
Using Secured Credit Cards to Build Credit
Once you’ve established credit via a secured credit card, there are tips you can exercise to boost your creditworthiness. Use your card modestly and pay off your balance every month. This shows credit card companies that you are responsible and don’t overspend. You can show this by making small purchases and paying them off. Also, make sure you’re paying your bill by the due date or before. This also shows responsibility. Even secured credit cards report to the different credit agencies. Your good faith efforts will be notated, although you have a secured credit card. Credit is credit, plain and simple. Once you’re handling your credit card responsibly, check your credit score periodically. As it improvers, you may be able to request a credit increase or an unsecured credit card which will also reflect positively on your credit.
Other Considerations Regarding Secured Credit Cards
Often, secured credit cards are better options than credit cards geared towards people with bad credit. The interest rates may be higher on secured credit cards. But they are often lower than credit cards that specifically target people with poor credit. Credit cards that target people with poor credit often have high non-refundable fees in addition to high-interest rates. This is one of the key reasons whey secured credit cards may be favorable for people looking to build credit because they don’t have any and people who have poor credit.
What Secured Credit Cards won’t Do…Typically
Secured credit cards usually don’t allow you to spend beyond the amount of your credit limit which is equal to your security deposit. Some credit card companies offer partially secured credit cards which may give you a credit limit that exceeds your deposit. However, most credit limits for secured cards are equal to your deposit.
Traditional Credit Cards (Unsecured)
In some situations, your credit may not be so poor that you can’t get a traditional credit card to build credit. In situations like this, it’s a good idea to look for a credit card with certain basic characteristics that make any card attractive. Low-interest rates are usually part of the key determining factors when it comes to choosing a credit card. Comparison shop and consider what’s important to you and any perks, aside from the basic things, that each card offers.
The road to good credit isn’t paved overnight. It takes time. Credit card companies need to see a steady history of on-time payments and responsible credit urs. However, proving your creditworthiness to credit card companies may not take as long as you think it will. In some situations, your credit score can improve significantly enough, within as little as six months, to yield better credit card offers along with a higher credit score.
All of this is possible through fundamental information and a thorough understanding of your credit situation. Know where you are on the credit map. Is your credit history fraught with bankruptcies, charge offs, and repossessions? Don’t apply for that platinum visa, choose a secured or basic credit card instead. Are you a student that has never had a credit card and whats to start building credit? Seek credit cards geared for students and beginning credit users and honor the credit terms. The key is picking a credit card that is right for you. Follow all the terms and conditions of the card. You’re bound to see improvement fairly quickly. If you can learn to incorporate the advice, tips, and tricks, you are on your way to building credit.
Nwayita is a personal finance writer who knows the value of getting the most out of her dollars. She understands that financial savvy is the key to making her budget stretch. She takes pride in sharing her financial planning and spending advice generously and prolifically. Her passion lies in helping millennials, as well as people of all ages and from all walks of life, develop rich habits they can use for life.