Wednesday, 18 October 2017

How to Build Credit When You are New to the Credit Card

Building credit is of utmost importance if you are looking for a stable financial life. Approval of car loans, home loans, personal loans; interest rates all depend on how strong your credit profile is. But getting started on this journey is a bit tricky. To have a credit score, you need at least one open account where the creditor has reported your activities of the past 6 months to the credit bureau. Based on this information the bureau will prepare your credit report and determine your credit score. But how do you get approved of credit and display responsible repayment behaviour in the absence of a credit history?
Well, a secured credit card can be your starting point. You do not need a credit check to get approved for a secured card. Here you make a cash deposit that serves as collateral for your credit line. Your credit limit will be determined on the basis of the amount of deposit you made. Since the lender’s risk is completely covered, the credit score is not taken into consideration before the approval. The card issuer reports the borrower’s activities to the bureau and gives him a chance to prove his creditworthiness. But possessing a card will do no good, unless you use it in the right way to build credit. If you are new to credit cards the following tips will help you to achieve your goal of an excellent credit score.
1.      Charge an expense to the card every month
 Just possessing a credit card will do no good to your credit history. You need to charge some small expenses to the card every month in order to keep your card active and demonstrate that you are responsible with the credit. Your credit profile will become strong only when positive credit activities are reported to the bureau. So make a few purchases using the card each month and pay the bill in full and on time.
2.      Keep a check on credit utilization rate
Credit utilization rate plays a significant role in determining one’s credit score. It is calculated by dividing the total balance on your card by the total credit limit. This balance can be a snapshot at any point in time when the lender reports the activity to the bureau. So even if you pay the balance in full each month, you may still have a very high credit utilization rate if you have charged several expenses in a month. A very high balance is a sign of financial instability. It gives an impression that you are desperate for credit and hence lowers your score. It is a good habit to utilize not more than 30% of available credit limit. So know your credit limits and keep a check on how much you charge each month along with the balance that you carry on the card.
3.      Make payments on time
Your payment behaviour contributes to 30% of the credit score. Making on-time payments consistently shows responsible behaviour and works in favour of your credit score. Make sure you never miss a credit card due date. Set auto pays or reminders to ensure that you are up to date with the payments.
4.      Pay the balance in full

Though you need to use your card to build credit you need not carry any balance on the card to do so. In fact paying the balance in full when the monthly statement arrives is the best practice. So live within your means and purchase only what you can afford to pay back in full. If you do proper budgeting and follow this golden rule, you can build credit without actually taking on any debt and paying interest charges.
5.      Check your credit report
Get your free credit report every year to check for any suspicious activity. Ensure that the information recorded in the credit report is correct. If you find any errors and discrepancies you can report it to the bureau and get it corrected.

Credit cards are a good way of building credit without actually taking on any debt. But you can get into a lot of trouble if it is not managed properly. Be sure to stick to your budget and not go overboard in spending just because you have available credit limit. Be responsible with the payments as it is the foundation for building good credit.

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