Using your credit card effectively will save you money and help you build a strong credit rating over time. 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 of good credit use also apply to life in general. Here are the principles of smart 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 must use a credit product that will be recorded on your credit report. In the beginning, you have to start small.
Many people are afraid to build their credibility. But you have to get into the game!
— Ross MacCo-star, “Get Smart with Money”
“A lot of people are afraid to build their own credit,” said Ross Mack, a Chicago financial expert and co-star of the new Netflix series “Get Smart with Your Money.” “But you have to play! Credit is a part of almost every aspect of life. Don’t wait.”
There are many entry-level credit cards developed for people without an established credit history. Some are secured credit cards where you can put your money as collateral, while others are unsecured and have a shorter initial line of credit.
As long as you handle these cards properly by paying your bills on time and keeping your debt at zero or very low levels, you’ll prove your expertise. After a few months, you may get your deposit back, making the account unsecured, or the issuer may raise the limit without you asking.
Building trust takes time, so the earlier you start, the better. This applies to just about everything from relationships to career development.
Resolve potential problems early
You might find yourself using the card to pay for things you can’t afford but want anyway. If you do, the debt can get out of hand and you’ll struggle to pay the full balance when the bills come. Unless you have a 0% APR credit card with no financing charges for certain months, you’ll want to lower your debt. This way, you can avoid interest being added to your balance.
Use your credit card issuer’s mobile app to track your purchases in real-time and suspend charges when you feel like they’re getting out of hand.
It’s better to stop the problem from happening in the first place rather than fix it later. The faster you hit the brakes, the easier it will be for you to reverse course and get back on track—credits and everything else.
Face your fears and find solutions
Eventually you may make a mistake that you can’t stop. You could miss the due date on your credit card and be assessed a late fee, or skip an entire payment cycle and be delinquent on your credit report. Or maybe you just charged a lot and you can’t make the minimum payment on a particularly large balance.
Regardless, when you focus on solutions, you can overcome anxiety, says Dr. Fern Kazlow, a clinical psychotherapist in New York City. “Accepting 100 percent responsibility without devaluing yourself is a huge life lesson,” Kazlow said. “This is your opportunity to continue to grow, and that means facing your fears, financial and otherwise.”
Get on the phone with your credit card issuer to explain what happened and come up with your solution. This is also your opportunity to ask if they can help you, such as waiving fees or offering a hardship program.
If you can have this tough conversation with your credit card issuer, you can also have this conversation with your spouse, boss, or friend when you screw up.
Set aside time to heal old wounds
OK, so you made some mistakes or decisions that hurt your credit. It happened. Maybe an account legally went into collections, or you filed for bankruptcy. While you can’t clear the negative but accurate information listed in your credit file, you can let it go in the background.
Under the Fair Credit Reporting Act, most derogatory information on your credit report will disappear from your report after seven years. (Chapter 7 bankruptcy will last for ten years.) When it happens, it will no longer count towards your score, and no one will know but you.
Don’t get caught up in the past. Rest assured that even painful mistakes will fade from memory.
Focus on the moment, move forward
While building a credit history over many years will help improve your credit score, the way you’ve treated your credit products in the past 12 to 24 months is more interesting to lenders than you did years ago.
In credit development, recency, frequency and severity are important. A small mistake you made a long time ago has little impact, while a regular round of bad mistakes over the past year can have a big impact.
“Using a sports analogy, you’re only as good as the last game,” Mac said. “Recency bias is real, but you can also use it to your advantage. You pay all your bills on time now and you didn’t before? Great. Keep it up.”
All the positive things you do now count. As they accumulate from this moment, they become your new normal.
Bring out your best qualities
The most popular credit scoring model is the FICO score. There are five categories of information used to develop it, some of which are weighted higher than others. But in general, each category matters:
- 35%: Payment history. If you receive all your bills on time, it proves that you are responsible.
- 30%: Credit usage. Credit cards are payment instruments, not supplemental income. When you charge but keep your balance low compared to the limit, you show that you are independent.
- 15%: credit history. The longer you use the credit product, the richer your history will be. When you use them well over the years, you show that you have matured.
- 10%: Credit type. When you use a number of different credit products, from credit cards to loans, you show how versatile it is.
- 10%: new credit. Applying for credit products cautiously is a sign of your stability. Having too many apps in a short period of time is a red flag for your desperation.
Taken together, these qualities highlight that you – as a credit user and as a person – are responsible, independent, mature, versatile and stable.
“What we do with credit and money is a powerful reflection of how we see ourselves,” Kazlow said. “It’s a great mirror, not a paddle you use to beat yourself up.”
Don’t settle for less
Credit card accounts are a two-way street. The card issuer allows you to borrow money to buy what you want, and at the same time, as the cardholder, you are contractually charged and paid. When you’ve created a good-to-great credit score, it’s time to actively pursue the benefits of your proven credit usage.
Always get the best credit card you are eligible for and that best fits your lifestyle. This way, you’ll enjoy a card with a rewards program that you can earn money from, plus benefits like travel allowances and consumer protections that make your life easier.
Be discerning. Know what’s out there and work hard for all the things you work hard for. And take action to get them because they probably won’t come to you.
you control the outcome
Credit issuers update your credit report monthly with your latest activity, and then credit scoring companies also take into account any financial data that appears on your report each month. This means you are in control of your credit rating. Each month your report and score will vary based on your work.
This effect on the way you are perceived is powerful. Depending on your job, each month could be a different story.
“There’s no question that a credit card can teach you a lot about yourself,” Mac said. “The lesson is the same. It’s about correcting mistakes, maintaining perspective and making a good impression.”