Why Having a Credit Card Helps Your Credit

Having a credit card can actually help – if you use it right!

A high credit score is always essential, whether you are buying a home anytime soon or not. Your FICO score and credit report are vital to getting any loan. 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, 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 helps your credit score.

How’s that, you might ask?

Because to qualify for any loan, a mortgage included, you need to have an established “credit history,” … and you can’t do that without a credit card.

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

Mortgage lenders and the bureaus determining your credit score 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.

You must know what to do and what to avoid to be deemed “credit-worthy” in a lender’s eyes. Your FICO score in your credit report plays a significant role in the loans you’ll qualify for, the interest rate you’ll get, and whether a lender will even work with you.

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

Let’s go over having a credit card, and take you through some important steps:

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 increases your credit score. 

You’ve got to use your card 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. Remember 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, keep your balances below 30% of your available credit. That helps your score.
• 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. You want to pay your bills on time and pay off your monthly balances. Sixty-five percent of your FICO score is your payment history.
• Open another card to increase your line of credit, thus improving your debt-to-income 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 few stores you use regularly and can pay off each month. 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. 

A strategic plan to build credit to become a homeowner is a great way to develop good credit habits. You can become the dependable customer that lenders 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. Your credit score matters when you want to take out any loan, for example, if you’re going to buy a car or refinance to take advantage of lower rates.

Next week, you’ll learn how to build 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.