Why Having A Credit Card Helps Your Credit

Having a high credit score is important all the time, whether you are buying a home anytime soon or not.  Your FICO score and credit report are so vital to getting any type of loan, and this series will give you the financial strategies you need to get your credit score as high as possible.

If one of your goals is not to use a credit card, then you might be hurting, not helping your credit score!

Seems counterintuitive, but it’s true. Most people may not realize that having, and using, a credit card actually helps your credit score.

How’s that you might ask?

Because in order to qualify for any type of loan, a mortgage included,  you need to have established “credit history” … and you can’t do that without having open lines of credit, like a credit card.

Credit cards are essential in helping you establish a credit history, even more so than a car or school loan.

Lenders that review your credit report want to see how well you “borrow credit” and handle monthly payments. They use this “history” to evaluate you.

But don’t rush out to get more cards … you MUST use your credit cards correctly or you’ll create a poor credit report. If done correctly, having a credit card can actually INCREASE your credit score.

It’s important that you know what to do and what to avoid in order to be deemed “credit-worthy” in a lender’s eyes.  Your FICO score in your credit report plays a big role in the loans you’ll qualify for, the interest rate you’ll get, and whether a lender will be able to qualify you for their loan products.

Plus, it can take at least 6 months to build or improve your credit, so start planning well before you want to take out a loan.

Let’s go over more details and take you through some important steps:

First thing’s first, if you don’t have a credit card, get one and use it for at least 6 months. 

Next, use your credit card smartly…in a way that increase your credit score.

You’ve got to use your card in order to build a credit history!

Using your card and paying off your balances will create a good credit utilization rate or debt-to-credit ratio.

This figure measures your total outstanding balance against your total available credit. Keep in mind that this ratio accounts for a third of your credit score.

Here are some key tips:

• Try to have low balances as you build your credit. If you must carry, try to keep your balances below 30% of your available credit, below 10% is even better. This helps your score. Having credit accounts and owing money on them does not necessarily mean you are a high risk borrower, but if you are using a lot of your available credit line it indicates that you are over-extending and at higher risk of default. Thirty percent of your FICO score is your amounts owed.
  • For example, if you have a credit card with a limit of $1,000, try not to carry a balance higher than $100.
• Develop a strategy of purchases and payments with your credit card(s) that will work with your budget. Do this for the next 6 months or so. Pay your bills on time, and if possible, pay off your balances each month. Thirty-five percent of your FICO score is your payment history.
  • For example, if you have a credit limit of $1,000 and you have a gym membership at $80 per month, you can use your credit card to pay your gym membership without exceeding 10% of the credit limit. Pay it off each month.
• Open another card to increase your line of credit, and thus improving your debt-to-credit ratio. But don’t go overboard and open up too many. Take it slow and be methodical so you don’t ruin your credit when you’re just starting out.
• Department store cards can become a dangerous habit so stick to a couple of stores that you use regularly and can pay off each month. It seems that every salesperson at checkout will ask if you want to get a card and save on your purchase that day. Don’t be swayed each time or you’ll end up with 10 cards with high interest.

Having a strategic plan to build credit to become a homeowner is a great way to develop good credit habits. You can become the type of dependable customer that lenders will love … you know how to responsibly “borrow” money and make payments.

Your credit habits – how you handle your debt and payments every month – will either increase or decrease your credit score.  And it’s not just about qualifying for your a mortgage, but your credit score matters when you want to take out any type of loan, for example if you want to buy a car, refinance, apply for a rental, and so on.

Next week, you’ll learn more ways to build up and maintain a good credit score. There are some things you NEVER want to do, especially if you’re in the market for a new home! So look out for Demystifying Your Credit Score, the next installment of my 4-week series.