Using credit cards effectively will save you money and, over time, help you build a strong credit rating. Do all the right things with your card, and you’ll impress other lenders and be rewarded for your efforts — including qualifying for the best products on the market.
All the rules for excellent credit use can be applied to life in general, too. Here are the principles of wise credit management, and how they can help you learn some of life’s most important lessons.
Don’t be afraid to start small
To create a credit history, you have to use credit products that will be recorded on your credit report. In the beginning, you have to start small.
A lot of people are scared to establish their credit. But you’ve got to get in the game!
— Ross Macco-star, ‘Get Smart with Money’
“A lot of people are scared to establish their credit,” says Ross Mac, a Chicago-based financial expert and co-star of the new Netflix series “Get Smart with Money.” “But you’ve got to get in the game! Credit is part of just about every facet of life. Don’t wait.”
There are plenty of starter credit cards developed for people without an established credit history. Some are secured credit cards where you put money down as collateral, while others are unsecured and have short initial credit lines.
As long as you handle these cards well by paying your bills on time and keeping your debt to zero or very low, you will be proving your expertise. After a certain number of months, you may get your security deposit back, making the account unsecured, or the issuer may increase the limit without you having to ask.
Building trust takes time, so the earlier you begin, the better. Which goes for pretty much everything, from relationships to professional development.
Address potential problems early
You may find yourself using the card to pay for things you can’t afford but want anyway. If you do, debt can spiral out of control, and you will have trouble paying the entire balance when the bill comes in. Unless you have a 0 percent APR credit card that won’t charge financing fees for a specific number of months, you’ll want to keep the debt down. This way, you can avoid interest from being added to the balance.
Track your purchases in real time with your credit issuer’s mobile app, and suspend charging when you feel they are getting out of control.
It’s always best to stop a problem from occurring in the first place, instead of having to fix it later. The faster you hit the brakes, the easier it will be for you to reverse course and get back on track — with credit and everything else.
Face your fears and find solutions
Eventually you may make a mistake you can’t stop. You may miss the due date on your credit card, then be assessed a late fee, or skip an entire payment cycle and then be hit with a late payment on your credit report. Or, maybe you just charged so much, you can’t make your minimum payment on an especially large balance.
Whatever the case, when you concentrate on solutions you can overcome anxiety, says Dr. Fern Kazlow, a New York City-based clinical psychotherapist. “Accepting 100 percent responsibility without devaluing yourself is a huge life lesson,” says Kazlow. “This is an opportunity for you to continue to grow, and that means facing your fears, financial and otherwise.”
Get on the phone with your credit card issuer, explain what happened and offer your ideas for resolution. This is also your chance to ask if they can do anything for you to help, such as waiving a fee or offering a hardship plan.
If you can have this type of hard conversation with your credit card issuer, you can have it with your spouse, boss or friend when you’ve messed up.
Allow time to heal old wounds
OK, so you made some mistakes or decisions that hurt your credit. It happens. Maybe an account legitimately went into collections, or you filed for bankruptcy. While you can’t purge negative but accurate information from being listed on your credit file, you can let it descend into the background.
As per the Fair Credit Reporting Act, most derogatory information on a credit report will fall off your report after seven years. (Chapter 7 bankruptcy will stay for ten years.) When it does, it will no longer be factored into your scores and no one will know about it but you.
Don’t get stuck in the past. Take solace that even painful mistakes will fade from memory.
Focus on the present and move forward
Although building a credit history over a number of years will help your credit scores rise, the way you’ve treated credit products over the past twelve to 24 months is far more interesting to a lender than what you did many years ago.
In credit development, recency, frequency and severity matter. A slight error you made once a long time ago will have very little impact, while a regular round of bad mistakes that occurred over the past year will have a lot.
“To use a sports analogy, you’re only as good as your last game,” says Mac. “Recency bias is real, but you can use it to your benefit, too. You’re paying all your bills on time now, when you didn’t before? Great. Keep it up.”
All the positive things you do now carry weight. As they build up from this moment, they become your new normal.
Flex your best qualities
The most popular credit scoring model is the FICO Score. There are five categories of information that are used to develop it, with some being weighted more heavily than others. In aggregate, each category is important, though:
- 35 percent: payment history. If you get all of your bills in on time, you are proving that you are responsible.
- 30 percent: credit utilization. Credit cards are payment tools, not supplemental income. When you charge but keep the balance low compared to the limit, you show that you are independent.
- 15 percent: credit history. The longer you have used credit products, the greater your history will be. When you use them well over many years, you show that you’re mature.
- 10 percent: types of credit. When you’ve used a number of different credit products, from credit cards to loans, you indicate versatility.
- 10 percent: new credit. Applying for credit products prudently is a sign that you are stable. Too many applications in a short span of time is a red flag that you’re desperate.
Combined, these qualities highlight that you are — as a credit user and a person — responsible, independent, mature, versatile and stable.
“What we do with credit and money is a powerful reflection of how we see ourselves,” says Kazlow. “It’s a great mirror, not a paddle that you beat yourself up with.”
Don’t settle for less
Credit card accounts are a two-way street. The issuer lets you borrow money that you can spend on the things you want to need while, as a cardholder, you charge and pay as contractually agreed. When you have created a good-to-excellent credit score, it’s time to actively pursue the perks that come with your proven credit use.
Always get the best credit cards you can qualify for and that best meets your lifestyle. This way you will enjoy cards with rewards programs that you can profit from and the benefits, like travel perks and consumer protection, that can make your life easier.
Be discerning. Know what is out there, and go for all the things you have worked hard for. And take action to get them, because they may not come to you.
You control the outcome
Credit issuers update credit reports with your most recent activity monthly, and then every month the credit scoring companies also factor in all financial data that appears on your report. This means you have control over your credit rating. Each month your reports and scores will be different based on what you do.
This kind of influence over the way you are perceived is powerful. Depending on what you do, every month can be a different story.
“There’s no question that credit cards can teach you a lot about yourself,” says Mac. “The lessons are the same. It’s about righting wrongs, keeping perspective and making a good impression.”