So you’ve been approved for a new, or perhaps your first credit card. Congratulations. Since you’ve been approved you may have noticed that having credit is not the same as having “good credit”. You may have applied for this card for a variety of reasons: For emergencies, purchasing expensive items, etc. The most common reason I’ve come across is to build credit. It’s easier said than done. I will explain several credit usage habits that will help you in various scenarios.
Know Your Limit
Of course, credit should be respected. The bank or institution that issued you your credit card has trusted you with a responsibility. Your responsibility is to purchase goods and services with their credit and to pay them back at a specified time every month. What most people do not realize is that there is a certain limit to credit usage that will help you the most. That limit, simply put, is 30-33%.
Basically, one-third of your total credit limit is ideal for building credit. To someone with a low amount of credit, this may seem pointless. If you are in this position, don’t disregard this just yet. Imagine this:
You have just been approved for your first credit card with a limit of $500
Your “building credit” limit is about $160
Instead of maxing out your card and buying expensive items you can do the responsible thing. Maintain this limit for a few months and watch your credit improve. Eventually, your bank may even increase your credit limit (sometimes without notice) due to your continued responsible habits. Not only will this improve your credit in the long run, but it will help you avoid incurring high amounts of interest that these “starter” cards usually come with. Soon enough you can take your good credit reputation and get approved for another, more substantial line or credit from another company.
Don’t Pay Off. Pay Down.
Often, people with maxed out accounts have trouble figuring out what to do with their accounts. Sometimes, they default and have their account closed by the creditor which will have lasting detrimental effects on their credit. But, those who are fortunate enough to have not reached that point have a choice.
Paying off your credit cards is not the worst idea, but it is far from the best idea. While better than defaulting on their credit, paying off your credit line has its negative effects too. Banks and lenders do not like to see “No current balance” or “Closed at borrowers request”. They like to see an active balance, regular usage and on-time payments. Get your balance down to a low threshold, use your card once a month and make your payment on time. This will look better on your credit report and improve your credibility in the future.
Make Smart Choices
What you do with your credit is up to you. It is always a smart choice to keep your balance low and it is essential that you make your monthly payments on time, every time. Keep the 33% rule in mind next time you sit down to go over your credit report. Reserving the majority of your available credit in case of emergency is a good motivator to keep you on track. Good luck and stay tuned to Dean Myerow Finance for more credit tips.