Maybe it was your credit card that got you into the red in the first place, but the good news is that you can use a credit card to build credit if you are responsible about how you use it.
Nowadays, not many businesses will provide you with any kind of loan or financing without an indication that you have a good credit record. This is why it is important to use a credit card or other such credit-type payment system over time so that you can develop a credit history and show that you are a good (or bad!) credit holder.
Tips to build credit using a credit card
- You only need to have one type of credit card to build a credit history; you don’t need to have multiple credit cards from different places. A credit card can be a credit card from a bank, a petrol card, store credit card, or any other kind of card that allows you to make purchases on credit. In fact, having too many credit cards does not look good on your credit record and if you have too many cards to pay off every month you may not be able to make all the payments in full. This not only reflects badly on your credit report, but also means that you will be paying more on credit interest every month.
- Have a credit limit on your credit cards. You can request for your bank to put a limit on the amount of money you can spend on your credit card each month.
- When you use a credit card to build credit, you are essentially showing that you can be responsible with the money lent to you and are good about paying back the full amount every month. The most important thing to do is to pay your debts in full and on time every month without fail. If you set yourself budgeted credit limits, this shouldn’t be a problem.
- Never buy something on credit that you couldn’t pay cash for. This is a sure way to prevent you from accruing debts you struggle to pay.
The credit catch-22
Without a credit history, it can be difficult to get your first credit card because lenders want to know that you are a good credit holder; so if you don’t have credit already, who will give it to you? In situations when you don’t’ have a previous credit history, lenders will have to look at other factors to decide whether or not lending you money will be a risk to them. This includes:
- Your employment history: lenders will look at your ability to hold a steady job. If you have has a steady job for a long time it means that your income is more regular, allowing you to budget for credit purchases.
- Your bank account history will also show how you spend your money, how much money you have to spend every month, and how regular you are with payments.
- Lenders may also look at your history of residence; it is better to have stable residence as this means that your rent or bond payments should stay stable. If you own a home this could also work in your favour as the lender can see that you have some collateral in case of non-payments.
- Having utility bills such as gas, water and electricity in your name shows that you are accustomed to paying bills every month.
To get your first credit card, first try applying at the bank where you have a savings or checking account. They will be able to assess your financial history with them and decide if they would like to grant you a credit card or not. Another option is department stores, which are often all too happy to sign you up for a credit account at their store; just be wary of high interest rates if you fail to pay on time!