Credit cards are some of the most common and useful financial products available in the market today. They offer a wide variety of payment options for consumers who wish to make purchases online, in stores, or withdraw cash from an ATM.
They come with both benefits and risks. It’s important to know how credit cards work and what you need to consider when choosing the right card for your needs.
But suppose you can manage the risks of using credit cards. In that case, you can improve your financial standing and gain access to more credit at better terms through improved creditworthiness.
Before exploring how credit cards can improve your credit score and its benefits, let’s understand what credit scores are.
What is a credit score?
Your credit score is a number based on your credit history that reflects how well you manage your debts. Lenders use it to determine the level of risk they would take when putting their money into an investment by you, typically through giving you a loan. The higher the score, the lower the risk for them.
There are basically four levels of credit scores:
- Excellent Credit Score (800 and above)
- Good Credit Score (740 – 799)
- Fair Credit Score (670 – 739 and below )
- Poor or Bad Credit Score (Below 670)
If you have a bad or poor credit score, your chances of getting approved for a loan or credit card will be very low. And in case you still manage to get one, the interest rates will be very high.
On the other hand, if you have an excellent credit score, your chances of getting approved for loans or credit cards are higher. You will even be able to get lower interest rates.
With these in mind, it’s clear that having a good credit score can help you save money and gain significant advantages when applying for various financial products.
Now you know more about credit scores, let’s explore how they can be improved through credit cards.
How do credit cards improve your credit score?
The most significant factor in determining how your credit score is calculated is on-time payment. You can expect to have a good, excellent, or poor credit rating depending on whether you have paid all your bills and debts on time or not.
Late payments are considered very bad for your credit history because it shows that you are irresponsible with money. This is why on-time payments are more important than how much money you owe or how many credit cards you have.
Now let’s explore five ways credit cards can improve your credit score.
1. Establishing a track record of on-time payment with your monthly statement
Since each creditor or lender will have their specific requirements, you should know the minimum amount of payments that would constitute an on-time payment.
Make sure you always meet this requirement so it can reflect on your payment history. You can then build upon that score each month by always making on-time payments.
2. Using different cards responsibly to create a variety
Credit scores are also calculated depending on the mix of open credit accounts you currently have. To avoid getting penalized with a low credit score, it is vital to manage all your accounts responsibly.
Don’t just focus on having one type of credit card or account because this will not help you improve your score. Keep in mind that creditors would like to see that you can manage different types of credits as well.
So if you currently have a credit card, it is important to get another one so there will be a mix in your credit history.
3. Paying off your balance in full to avoid paying interest
It is also important that you avoid thinking of your credit cards as an extension of cash because you are not using them right if you think this way. Remember, the fundamental purpose of a credit card is for you to make purchases and pay for them within a grace period without interest.
So you should avoid getting cash advances or making balance transfers because these will affect your credit score negatively. You should always make sure you don’t use over 50% of the suggested credit limit unless you really have to. And if possible, try to stick with using less than 30%.
4. Utilizing credit cards that offer rewards programs
You should also look for a credit card with the right features. There are different types of credit cards, and each one has its own set of characteristics, like how it would affect your interest rates and payment due date.
You should find a credit card that suits you best and fits your lifestyle. Remember, in addition to establishing a good credit score through using the right credit card, you can also get rewards like air miles or even discounts on your next purchase if you use the right card.
5. Paying off your balance as soon as you can
Paying off your entire credit card balance as early as possible is the best way to avoid accruing interest. Of course, you should try and pay off your balance every month because if you don’t, it could end up affecting your excellent credit score.
Your lenders only care about how fast you can give them their money back. Paying your debts as soon as possible helps you establish a better credit score. Later, you will be able to increase your borrowing power.
Benefits of having a higher credit score
Having a higher credit score is not just about how fast you can pay off your debts. There are many benefits of having a good credit score, such as;
1. The chance of getting approved for bigger loans and mortgages
You will get more favorable rates when borrowing money for big purchases like cars or homes. This means you will be able to save more money because of the lower interest rates.
2. Better options for renting homes and apartments
Landlords would also prefer tenants with good credit scores. So if you have a good credit history, you should find it easier to rent than other applicants. You can get better deals on your apartment or housing unit compared to other people.
3. You get to save more money by getting lower premiums
Car insurance companies would also base their quotes on your credit scores. If you have a higher score, you will pay less for car coverage than other applicants. This is possible because people with good credit scores are expected to be responsible and law-abiding citizens.
4. You get to open more extensive credit lines than people with low scores
If you have a good credit score, some lenders would be willing to give you more than what you actually need. This is because the chance of you defaulting on your loan is very minimal. So lenders can take advantage of it by giving you more money.
Having this in mind, you should try to manage your finances well to get the most out of the situation.
Although lenders can offer you more than what you need, don’t be tempted to accept it. Remember, there are fees involved. So only use what you actually need.
5. You’ll have more negotiating power
The higher your credit score, the more negotiating power you will have. Furthermore, you should be able to negotiate better deals and get them because having good credit scores means lenders will see you as a less risky and profitable customer.
Your credit score is as important as your school grades. In fact, it might affect your chances of getting a good job or even getting a loan. One of the best ways to improve your credit score is by using the right credit card at the right time.
You should be able to get a very high credit score if you are responsible enough in paying on time and avoiding accruing interest on cash advances.