Whether you’re a college student just wading into the financial waters or have just moved to this country and have no US-based credit history, you may be wondering if credit cards are a smart option for building and improving credit. The answer is more complicated than you might expect. Keep reading to find out how—and whether—credit cards can help you improve your credit score.
Double-Edged Sword
If you’re like most Americans, you likely hold at least one—and possibly several—credit cards. Many people turn to credit cards to augment their purchasing power, which can be a good thing. But it can also land you in hot financial water: the average credit card debt per household in America is nearly $16,000. When used responsibly, however, a credit card can represent a valuable, long-lasting credit reference. On the other hand, if you spend too much and pay only the minimum balance each month, things can soon get out of control.
Responsible Use Leads to Improved Credit
Luckily, the risk of racking up too much debt doesn’t make taking out a line of credit a bad idea. Yes, it is possible to use credit cards to boost your credit. This is especially good news for college students who are just making their first foray into the world of financial responsibility. Getting a credit card before graduation, being moderate with your spending and paying your balance on time each month means you can build up a solid credit history. In turn, this makes it easier for you to get a loan for a car or rent an apartment.
When you use credit cards, you’re utilizing a safe form of payment for bills and making purchases online. Some credit cards allow you to earn points and rewards, and you will have a backup in case an emergency arises and you need quick funds. When using your credit cards responsibly in an effort to increase your credit score, it’s important that you pay off your card on time each month. Doing so shows lenders you can be counted on. That history of reliability will come in handy later when you want to make a big purchase, such as a home, that requires the lender to have some faith in your ability to pay. If you can’t pay off your card completely each month, at least pay it on time. According to Daily Finance, one recent late payment can cause a drop of between 90 and 110 points on your FICO score of 780 or higher.
Just Starting Out
If you’re new to the United States, you may have little to no knowledge of how your credit score works and how credit cards can affect it. Keep in mind that when you’re just starting to build your credit, it takes time to build up a positive score: at least several billing cycles. It make take you several months to see your credit score jump, even if you’ve been paying on time. The key is to keep plugging away at making purchases you can afford, maintaining a low balance (less than 30% of the credit limit> is ideal), then paying them off on time. A FICO score of 750 is an excellent goal.
Credit cards, when used responsibly and in tandem with other healthy spending practices, can be an excellent tool for boosting your credit score. If your score is stuck on the low end of the spectrum, don’t be discouraged. Keep making payments on time, spending wisely and demonstrating your financial reliability and your score is sure to climb.
