Here's a simple fact that many people might not know: Credit cards can help you rebuild your credit score! If you understand how credit scoring works and know the right kind of expenses to charge on your credit card, you can take a big step toward getting your credit where you want (and need) it to be. First, you have to understand a fundamental rule of improving your credit health: In order to rebuild your credit, you must use credit cards wisely. That’s what we are going to examine in this article.
Wield Your Plastic Wisely
Getting approved for a credit card is just the start—next, you need to master the credit behaviors that can improve your credit score.
1. Use credit sparingly at first
You don't want to fall back on old habits by spending beyond your means. Whatever you use it for, limit yourself to a couple of smaller purchases each month, then tuck the card away until next month when the balance is back to zero.
2. Automate your payments so you're never late
Late payments can send credit scores plummeting—a big no-no if you're trying to rebuild your credit. Set up your credit card account so that the minimum payment is automatically deducted from your bank account. That way you don't have to worry about a due date slipping through the cracks.
3. Don't carry a balance
Your goal: However much you charge, you want to aim to pay off the full amount by or before the due date. This will help you avoid expensive interest charges on top of what you owe and illustrate to credit issuers that you aren't spending beyond your means.
4. Watch the utilization ratio all month long
Even if you're paying the bill in full at the end of the month, using most or all of your available credit can still bite you. That's because if a credit issuer reports your activity before your payment due date, it can appear that you're close to maxing out your card. Your strategy: Figure out what 30% of your credit limit is and self-impose that amount as the maximum you can owe at any given time.
5. Nip lateness in the bud
If you do happen to miss a payment, get on the phone or go online to the issuer ASAP. Late payments are not reported to the credit bureaus until you miss a full payment cycle (30 days), so there's a little leeway if you can get your payment in before that. But don't make this a habit since you'll be hit with late fees and may end up with a high penalty APR.
Final Thoughts: Your Credit Score
By carefully reintroducing credit card spending into your life, you can stay on top of payments and keep your utilization in the credit-score-friendly range. With a proven track record of on-time payments, you will most likely be able to graduate to better credit cards over time. Even better you will have learned responsible credit use. Those skills can change your life.