Those who know how to use their credit cards wisely are few and far between. Or perhaps it’s more accurate to say that most of us have had to learn the hard way that buying on credit can be a very dangerous proposition. If we’re lucky, we learned our lesson after racking up massive credit card debt and then having to pay it off. But some people carry debt for years, spending more on credit as soon as they pay a portion of it off, perpetuating their debt and damaging their credit score in the process. In short, they never learn. What many fail to realize is just how much of an impact credit cards can have on a person’s credit score. But when you understand the relationship between the two, you can find ways to use credit cards to raise and maintain a top tier credit score.
The journey to a good credit score begins with building credit. And this begins with taking on debt. Where people start to get into trouble is by thinking that credit is the same as cash. They trick themselves into thinking that the money on a card is money in the bank. Instead, think of every credit card swipe as a mini-loan. One of the best ways to get a handle on this situation is to take out a secured credit card.
Many banks (and some credit card companies) offer such cards to those with no credit to speak of (teens and young adults, for example) or those who are trying to rebuild their credit. As long as you have a bank account, you simply provide funds as collateral in the amount of the card limit. You might give the bank a check for $500 and receive a card with a $500 limit. This is a failsafe for the bank since your ability and willingness to pay are unproven. If you hit your limit and fail to pay, the bank can simply recoup their costs with the collateral they’re holding. It’s only fair since they’re taking a risk by lending you money.
But if you are smart and pay your card in full each month, you will get your collateral back at the end of a trial period (say a year), along with any interest earned. Plus, you’ll get to keep your card, your limit may increase, and you will have started to build a credit history, complete with a rising credit score that you can maintain and increase if you use credit wisely.
But what if you haven’t been so smart with your credit usage and you now find yourself saddled with debt? The first thing to do is create a plan for debt elimination. This could mean cutting up credit cards to remove temptation, creating a budget to quell unnecessary spending, and slowly paying down debt while moving balances to lower interest rate cards. After that you can clear up any black marks on your credit score and start fresh, knowing the wrong ways to use a credit card and figuring out how to avoid them. By choosing cards with the best rates, imposing personal limits based on your budget, and paying your card in full each month rather than carrying a balance and spending extra on interest fees, you can raise your credit score through the careful use of credit cards.