Using credit cards is one of the best ways to build credit.
How does using credit cards help me build credit?
Many people think they are smart and have used sound financial judgment if they don’t use credit cards. Nothing could be further from the truth. If you don’t use your credit cards, you lose your credit is a better way to look at things. If you are a young adult you should start building credit now to prepare for long-term financial goals. Compare the best credit cards for young adults. Without established credit, people face difficulties down the road. It will not only be difficult to get approved for a car loan but a mortgage will be impossible. Building credit now is preparing for the future.
Why do I need credit cards to build credit?
One of the worse things you can do is pay off all your credit card bills off and then cancel your credit cards. Even if you hold a mortgage or auto loan, you will lose some points off your credit score. The credit reporting agencies want to see a variety of different credit accounts on your report. Also, these accounts need to be used on a regular basis. If you have a Visa credit card and never use it, you are not sending any on time payment history back to the credit bureaus. Whether you are a credit risk or not can be correctly assessed because the cards are not used.
Even if you rarely use a credit card never cancel the card. Canceling a credit card most often lowers your overall credit score. Another reason not to write off a credit card is that old credit card accounts are valued more than new credit card accounts that were just opened.
One common misconception is that you need to carry a balance from month to month to raise your credit score. This is not true. You can make purchases and then pay the entire balance off at the end of the month. Paying your entire credit card balance each month will avoid interest from being charged and credit card fees. You only need to use your card from time to time to show some credit activity. There is another benefit to using your credit cards more regularly. Sometimes when credit cards are not used for an extended period, they will get canceled by the credit card company. This is particularly the case of department store credit cards.
How are credit cards different than other types of credit?
One reason credit card accounts help boost a credit score is that it is a revolving account. Credit cards are not open for a fixed period. Cardholders are free to use credit for any period. Cardholders are free to use the credit card to its limit. This is why credit cards tell a true tale of a person’s financial status. People tend to max out their credit cards when they are experiencing financial difficulties. A car loan, for example, has the same payment due each month. Only when someone misses payments on their auto loan does it indicate the possibility of financial strife.
Tip: Use no more than a total of thirty percent of your credit lines at any given time. When you use only this limited amount, it conveys financial security and independent wealth.
It is important to understand that many other factors contribute to how your credit score is tabulated. Following the advice given in this article will help you maintain and increase your overall credit score. This will help you build your credit score from fair to good.
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