Use Your Card To Build Better Credit!

Why do you want a credit card? For convenience, of course. No more running off to a bank or ATM for cash, no worries about carrying more cash than you feel safe having in your pocket, and of course, there's the ability to make a purchase or pay a bill while pushing the actual payment back a little. Those obvious reasons are compelling enough, but they are just the beginning. Your card is a practical, affordable way to establish a solid reputation for financial management. That may not seem like a compelling reason now, but a good credit score can save you a lot of money and a loot of trouble when it comes time to negotiate a car loan or a mortgage. Building that good score takes time, but it's all in a day's work when you're looking to become more financially responsible. When used correctly, that piece of plastic can cement you as a creditworthy borrower in the eyes of potential lenders and creditors. If you use it irresponsibly, you can ruin your borrowing reputation and put your score into a tailspin.

Selecting a card is an important decision, so it helps to know what you want. The first thing to look at is the APR or annual percentage interest rate. The lower the APR, the better. You should also review fees; if the APR is low, but there's an annual fee, the fee may negate any savings you'd see, especially if you don't plan to use it a lot.

Budgeting Payments
Most financial advisors agree that paying your balance off each month is best practice. Balances paid within a fixed period each month are likely to be interest-free. By paying off your balance in full, you avoid paying any interest and fees on the money you spend.

Although it is ideal to pay off your balance in full, you can also demonstrate your ability to manage your credit by running a balance each month. You can score points by not exceeding one-third of your available limit each month, which demonstrates healthy spending and payment habits. For example, if your initial limit is $1,000, then running a balance of no more than $333 shows that you can manage money. If you decide to run a balance, be sure that the payment due is never more than you can afford to pay at once. Drawing up a simple budget and sticking to it is important since paying late can drive down your score, even if you're only a few days late one time. In some cases, a late payment can also trigger a rise in your APR, which makes any balance and any future purchases cost more.

Developing Healthy Bill-Paying Habits
Use your card as a tool to improve your financial picture by putting it to work paying bills on time. Creditors evaluate you based on your payment history and track record. If you use a card to pay your bills on time within their established due dates and then pay the balance in full, you show yourself as a responsible steward of your finances in two ways, paying two bills on time. That's going to help when it's time to take out a major loan or open a line of credit.

Understanding Your Limit
Your credit score depends heavily on your previous use of credit. Your card's limit determines how much you can spend; exceeding this limit can have a negative impact on your score. Remain well below the limit at all times to reap the maximum benefit for your rating.

Reading the Fine Print
Always read the fine print in the agreement. There are often contingencies and terms buried in the fine print that make an otherwise good deal look sour. Watch for introductory rates that change after a period. While you might enjoy a zero-percent APR for the first few months, that rate can rise to an excessively high level once you've owned the account for a while, so you can be caught off guard when your bill gets unmanageable. Excessive fees may also make the deal less than appealing at a second glance; for instance, you card may be able to transfer a balance from another card, but those transfers may be absorbed faster than you expected.

Looking for Perks
If you're going to own a card or two, then it makes sense to look for those with perks that you can use and skip over those that don't have any extra incentives. If you're a frequent flyer, for example, then you might choose a deal that offers "airline miles" that accumulate with each use. If you don't fly or fly minimally, then you may be better off with one that offers cash back on your purchases, additional warranty coverage on purchases, or other perks.

Paying Off Multiple Cards
Transferring a balance from one card to another one that has a lower interest rate can help you save big if you have a high APR. If you can transfer a balance from a higher-APR card to one with a lower interest rate, do it. If you don't, focus on paying down or paying off the ones with the highest APRs first. Once you pay your card off, consider keeping it open, even if you have others with lower APRs and better terms. Creditors look at account age: the older the account, the better you look as a borrower. However, your available credit affects your credit-to-debt ratio, which can also affect your score and affect your favorability in the eyes of lenders. Most banks want to see this ratio below 30 percent; any higher and they may see you as having too much credit availability, which is a negative indicator. Having one card that you seldom use as a backup is fine, having too many looks like too many!

There you have it – a few tips on becoming a responsible credit card holder and using your card to build your reputation as a reliable borrower. Diligent and responsible use of your plastic friend can set you up for a lifetime of good credit, and credit cards have a big role to play in helping you get there.