How Do Credit Cards Help to Build Credit History?

Credit Cards Help Build Credit History

Your credit history and score are based on a variety of factors including your history with credit cards. Creditors like to see how well you manage different types of credit when considering your application, so credit cards are an important building block for a strong credit history. The longer you have had a credit card, the more positive the impact on your credit report and score.

If you are considering closing any credit card accounts, always keep the card that you have had the longest. If you are rebuilding or just starting out, consider a secured credit card to build your credit history. Secured credit cards are guaranteed by the amount of funds you place in an account with the card issuer. With time, the account can become unsecured.

Build Credit History by Keeping Credit Card Debt Low

Build a strong credit history by maintaining credit card debt at or less than 30% of your total available credit. Too much credit card debt has a negative impact on your credit report and score because it often signals financial trouble.

When credit card debt is high, the debt to income ratio is usually out of balance. In other words, you have more bills than you have money. Creditors lose confidence that you will be able to repay your debts. When this happens you run the risk of being denied credit or offered credit at an unfavorable rate of interest.

Also, keep the debt ratio in mind if you are considering closing any accounts. When you close accounts you have less available credit relative to your debt. Your score will likely take a hit. Rather than close accounts, it is often better to put the cards away and resolve not to use them. If spending discipline is an issue, it is probably better to close accounts than to incur large debts.

Build Credit History by Paying Credit Cards on Time

Each time you use a credit card you are borrowing money from the creditor. The expectation is that you will pay the money back, with interest. Build a strong credit history by paying at least the minimum amount due, on time every month. Ideally, you will pay more than the minimum. Paying only the minimum leads to higher finance charges over the life of the loan. The bottom line is that your $100 purchase could cost more than twice that amount when you consider late fees and interest.