Everybody is quite familiar with credit cards whether they use them or not. Most will use a credit card to make unnecessary purchases and not truly understand why to use a credit card.
Early in life, it may be fun and tempting to sign up for a credit card and start buying your favorite things. Shortly enough the bill shows up and you must begin making payments. Now you must commit to these payments and ensure they are made.
Missing payments will result in damage to your credit score which will reflect poorly on any future loans like a mortgage or auto loan.
Specifically, if you happen to have zero percent APR, consider yourself lucky at the moment. Usually, zero percent APR is an introductory offer that will last somewhere around 6 months or maybe up to a year. Use this opportunity to purchase something you know you can pay off before interest kicks in.
Credit cards are a necessary evil that must be used properly and primarily for building credit. Using a credit card responsibly to build credit is actually pretty easy, but first a little look at the history of credit cards and how they became to be what they are today.
History of Credit Cards
The first type of credit card, or charge card rather, was issued in the United States in the early 1950s. Known as The Diners Club Card, this was the first general-purpose charge card created.
The difference between a credit card and a charge card is that a charge card requires cardholders to pay their balance in full each month.
Eventually, in 1958, Bank of America launched the BankAmericard. This card was the first to offer revolving credit, which allowed cardholders to carry a balance from month to month and pay interest on it. As years moved on and technology began to change, the introduction of the magnetic strip was developed.
In 1969 the magnetic strip made it possible for credit cards to be swiped at point-of-sale terminals. This not only sped up the checkout process but made it rather convenient for both the customer and the employee.
The first credit card rewards program was introduced in the 1970s and gave cardholders points or miles for every dollar they spent. These points could then be redeemed for travel, merchandise, or other rewards. Incentive programs like this easily increased the usage of credit cards because it felt like they were giving back to you when using their card.
Increase in Popularity
In the 1980s, the internet was still in its early stages of development, but it was growing rapidly. This led to the rise of online shopping, which made it possible for consumers to buy goods and services from anywhere in the world. Purchasing online became even more popular in the mid to late 1990s.
Credit cards were the preferred payment method for online purchases, as they offered a convenient and secure way to pay. These days we use several forms of payment including credit cards, debit cards, mobile wallets, contactless payment, etc.
Not only are these incredibly convenient but also secure because you still have to use biometrics, a PIN, or a password to authorize payment.
Today, credit cards are a ubiquitous part of our lives. They are used by millions of people around the world to make purchases, build credit, and earn rewards. Most of us prefer to shop online from the comfort of our own homes. We can search online much easier than physically going from store to store trying to find a deal.
Furthermore, with websites like Amazon, eBay, and Walmart one could easily buy everything they needed online. In the future, there will no doubt be a world filled with people who have implanted chips in their body that contains all relevant financial records. No more need for a smart device when you are the device.
Credit Reports
A credit report is a detailed history of your credit accounts, including your payment history, credit limits, and balances. It is used by lenders to assess your creditworthiness, which is their measure of how likely you are to repay a loan.
Your credit report is important because it can affect your ability to get approved for loans, credit cards, and other forms of credit. It can also affect the interest rates you are offered and usually takes a minimum of six months to generate your first credit score.
However, it may take longer to build good credit, depending on your payment history and other factors.
Here are some of the things typically included in a credit report:
- Personal Information. Basic details like your name, address, and Social Security number are obviously needed.
- Credit Accounts. Type of account (mortgage, auto, credit, etc.), the date it was opened, and the current balance.
- Payment History. Dates that payments were made and whether they were made on time. It is very important these payments are met on time.
- Credit Limits & Utilization. The percentage of your available credit that you are currently using. It is calculated by dividing your total credit card balances by your total credit limits. Having a credit card with a $1,000 limit and a balance of $500 would make your credit utilization 50%.
- Any public records such as bankruptcies, foreclosures, etc.
Know Your Score
Knowing your credit score is important to help stay in check financially especially when applying for a loan. The Fair Issac Corporation, or FICO, is the largest of several companies that provide software for calculating credit scores.
A general idea of the FICO credit scoring model goes as follows:
- Credit scores from 580 to 669 are considered FAIR
- 670 to 739 are considered GOOD
- 740 to 799 are considered VERY GOOD
- 800 and up are considered EXCELLENT
A higher credit score indicates that you have a history of making timely payments on your debts, which makes you a more attractive borrower to lenders. Those with low credit scores, typically below 580, may be considered high-risk borrowers and may have to pay higher interest rates on loans.
You are entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once per year. Obtain your free credit reports at AnnualCreditReport.com.
Always review your credit report carefully for any errors. Look for any errors and dispute them with the credit bureau immediately.
Building Good Credit
Using a credit card responsibly is one of the best ways to build a good credit history. Responsible use of a credit card requires knowledge of why to even have one in the first place.
When using a credit card make sure you already have the amount in cash that way when your bill comes up you can pay in full. Deciding to pay off the amount over several months is not the wisest of ideas when trying to build good credit.
Instead, pay the balance off right away. This will put you on good terms with any future lenders allowing for better interest rates.
Interest rates vary from lender to lender so make sure to compare. For lower interest rates see your local credit union. A credit union will tend to have lower rates on credit cards and loans although the limits may vary.
Choose the card with no hidden fees, no annual fees, and the lowest APR available. High-interest cards are bad and can keep you in minimum payments for a very long time.
For example, if you have a credit card with $2500.00 charged on it with an APR of 29%, your interest payment alone is over $60 a month. So, if you paid $100 monthly the total interest paid would be roughly $2078 adding the total to around $4500, and take 70 months to pay off.
Tips For Building Good Credit
- Pay Your Bill On Time. This is the single most important thing you can do to build good credit. Your payment history makes up 35% of your FICO Score, the score used by 90% of top lenders.
- Keep Your Utilization Low. Utilization is the amount of your credit limit that you’re using. Aim to keep your utilization below 30%.
- Use Card Regularly. Do not let your card sit unused. Using your card and paying your bill on time will help you establish a good payment history.
- Consider a Secured Credit Card. If you have no credit history or bad credit, you may want to consider a secured credit card which requires you to make a deposit, to act as your credit limit.
- Opening Accounts. Avoid opening too many new accounts in a short period of time. This can hurt your credit score.
- Monthly Balance. Pay your bill in full each month. Carrying a balance will add interest charges, which can hurt your credit score.
Additional Tips
- Auto Payments. Set up automatic payments for the full balance due each month to help avoid late payments.
- Affordability. Use your credit card only for purchases that you can afford to pay off in full each month.
- Smart Purchases Only. Do not use your credit card to finance a vacation or other major purchases. This can lead to debt problems faster than you can imagine.
- Fees & Fine Print. Be aware of the fees associated with your credit card, such as late payment fees and annual fees. Read the fine print and know exactly what you are signing up for.
Plan ahead financially and only use a credit card when building good credit. Be very careful about using one for an emergency because it may lead to a wormhole of debt.
Following proper tips and advice for building good credit with a credit card is more valuable than you think.
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Resources:
- Equifax
- Hello Stretch
- Credit Cards by BankRate
- Featured Image Courtesy of Free Stock photos by Vecteezy