Growing up, “credit card” was a forbidden word.
We were the “Let’s put these Christmas gifts on layaway,” type of household, not the “Just charge it all to my American Express” type, if you catch my drift.
Credit cards were assumed to only be used by the rich: people who could pay it off in time without falling behind on payments and falling into debt. We weren’t poor, but we were very close to living paycheck-to-paycheck. Any extra spending outside of necessities needed to be saved up over time, NOT thrown on a credit card.
Being in debt was the fear.
Flash forward to my adulthood, after investing time to learn about healthy money management on my own, I realized that credit cards aren’t bad at all. When utilized correctly, they can actually help you save money and improve your credit score.
For those of you who don’t understand the importance of a good credit score, let’s break down the reasons why you need one:
- Renting an apartment
- Buying a car
- Buying a home
- Starting a business
- Receiving low-interest rates or waived fees
Aside from renting a home, you’ll need a loan for the remaining listed examples. A good credit score (generally a 680 and above) shows lenders you’re a reliable lendee and able to pay them back. Even with renting an apartment, good credit scores show property owners that you’re responsible and will pay your rent in full and on time. Yes, some companies and leasing agencies work with you if you have a lower than average credit score, but that’s usually by charging you higher interest rates, extra fees, and unnecessary requirements, such as higher security deposits and needing a cosigner.
Even if you don’t have a credit card, there are other ways you’ve developed credit over time that can make or break your score. So, if you’re convinced that your credit score can use some tender, love, and care, let’s get down to the nitty-gritty.
1. Pay Bills on Time
Rent or mortgage, utilities (electric, water, gas) cell phone plan, car loan…you name it. Any and every bill in your name is attached to your credit report. Payment of these, or the lack thereof, is reported to credit bureaus.
Any time you make a late payment or miss a payment, they’re notified. Several late or missed payments can result in higher interest rates on your balance, which means more money for you to pay back, as well as lowering your credit score. If the pattern continues, your credit card account can be frozen and sent to a collections agency, which is problematic. This can negatively impact your credit score for several years, which can prevent you from qualifying for loans, renting or buying a home or car, and more.
With that said, do what you need to do to make sure your bills are always paid and paid on time. Mark the dates on your calendar, set reminder alerts on your smartphone, set up auto-pay for the bills you can pay online (if available), and most importantly, set aside money each month designated to bills (I’ll talk more about how to budget in another post).
2. Keep Your Credit Card Balance Low
The ideal balance (that looks good to credit companies and loan lenders) is when your balance or spending stays below ⅓ of your total credit limit. For example, if your credit card limit is $2,000, try not to spend more than $700 and always pay it off (or at least a large portion of it) by the due date to keep from building interest and accumulating debt.
Sometimes life happens—car repairs, unexpected bills, etc. that require money than expected—and using your credit card is more convenient. I’ve been in those situations and completely understand. This is why it’s important to have an emergency savings or rainy day fund set aside (we’ll talk more about that in another post). If you don’t have any savings in this situation, try to at least pay a portion out of pocket and put the remainder of your credit card. Then, analyze and adjust your monthly budget to make sure you pay off that balance on time.
3. Check Your Credit Report Annually
By law, you are allowed one free report of your credit history from each of the three national credit bureaus—Equifax, Experian, and TransUnion—per year (they charge a fee to request more). This helps you keep track of any account of credit you’ve opened within the past decade. Sometimes there are errors or things the credit companies overlook, such as an old utility bill that may not have been paid because the bill wasn’t mailed to your new address. Small things like that can build up over time and lower your score. Once discovered and corrected, it can make a huge impact on raising your score.
So, here’s a quick recap: a good credit score means you’re reliable, responsible, and a force to be reckoned with. Remember, a 680 score and above is considered good, so aim high! You got this!