One of the first steps in establishing a good credit history is obtaining a credit card. If you are in the process of building your credit history or are repairing your credit report, a credit card can really help. While you will hear most financial advisors warn of the dangers of credit cards, this may be the one time you are told to get one.
Your credit report is essential to being able to function in today’s world. You have to have a good credit history in order to get utilities, rent an apartment, have reasonable auto insurance premiums and borrow money. Without a credit history, you may need to put down a large cash deposit just to get electricity or water service to your home. If you ever plan to buy your own home, you will need a credit history that reflects good credit habits.
Every action you take in regards to your credit is recorded in your credit history. Consider this when you think about skipping a payment or taking on an extra loan. It is possible to repair your credit history, it just takes re-establishing positive credit habits and a little time.
You can build your credit in many ways. One of the easiest types of credit to start with is the department store card. The interest is usually higher, but they are often quite easy to be approved for.
If you have a checking account at a local bank or credit union (which is a necessity for financial management), you may be able to receive a small personal loan that you then pay off.
However, having at least one major credit card account on your credit report will not only improve your credit score, but it will show lenders that you are able to handle your debts.
But the secret to success is that you must not fall into the credit card trap. Never use the card to pay for every expense that you would normally pay cash for. The idea behind this method is that at the end of the month, you simply write a check for the total amount you owe. Sounds nice in theory, but this rarely works.
Why? Because you loose track of what you are spending on your credit card.
Instead, I suggest two methods.
Method one depends on you using the internet to manage your account. Find out how many credit card payments you can make online during each month. For example, my card limits me to four payments on my account each month. If I were building my credit, I would plan to make four purchases during each month. These would be for items I would normally purchase. For example, during the first week of the month, I would purchase my groceries. When I get home, I immediately make a payment from my checking towards my credit card via the internet. The next week, I might purchase gas. Immediately, I make the payment for the full amount I’ve spent. You get the idea. This way, you avoid paying any finance charges on your account. You can do this twice a month, once a month or even once every other month.
Method two is for those who prefer to pay their credit card account by postal service. You simply use your card a couple of times a month. When you arrive home, you immediately write a check in the amount you’ve spent to your credit card company. Take this amount out of your checking account register. Put the checks in your bill organizer and when the monthly bill arrives, you simply put the checks in the envelope and mail them. This is one of the best methods I have ever seen at managing your credit card spending.
Keep in mind that you don’t have to spend hundreds of dollars each month on your credit card. Just a tank of gas every now and then will do it. What you are showing is that you can charge to your card and pay off. Lenders love to see borrowers who pay off their credit card balances in full each month. This shows that you are able to manage your money well. Do this for a year or two and you will find that you have an excellent start at a credit history. Just make your payment on time each month and in full.
If for any reason, you find that you are not able to pay off your credit card in full with each statement, you need to stop charging on it until you pay it down to zero. Take the card and put it in a safe deposit box or freeze it in a plastic bag full of water. If you don’t have it with you when you are shopping, you can’t use it.
If you are trying to improve or establish your credit, take out a credit card and use it wisely. There are so many credit card offers out there that it can be confusing. Choose a card with no annual fee, a long grace period and a low interest rate. You don’t have to have a large credit limit to start with. Do your research and use your credit wisely.