There is so much information available to you out there, it's hard to know what is correct and what is only half correct.
Many websites claim that keeping your credit-utilization ratio, that is the amount you owe versus the amount of credit the lender extended you, at or below 30% is the best way to build credit. While they are not wrong, it will help you build credit. It would be raise your score faster if you kept it under 10% or if you're really trying to give yourself a boost, keep it under 5%.
This isn't as easy as it sounds, a 10% usage on a $1000 limit is just $100. Dinner for the family can easily exceed that. But here are some easy to use tips.
1. Pay before your bill cycle ends. Every loan has a bill cycle date. Make a payment to get your balance under that 10% mark. This means that you can max your credit card out anytime you want as long as before your bill cycle date you have made a payment.
Example:
Credit limit: $1000
Bill cycle date: 18th of each month
Current balance: $400
Current date: 10th of the month
You're currently at a 40% utilization ratio, this can negatively impact your score, it shows that you are spending more than you earn. And that you are relying on credit to make ends meet.
Make a $301 payment before the 18th, and this will actually boost your score.
2. It's easier than you think
You can use your credit card to earn cash back and you can use it like a debit card. Don't spend more money than you have, it's that simple. If you have $200 in your bank account then don't spend more than that $200 on your credit card. Doing so will cause you to leave a balance on the card. Then we are dealing with over utilization of your credit again.
3. Try not to close any credit cards
Closing accounts will reduce the number of accounts in good standing on your report. Rather than closing them, just use them for something small and then pay the balance off. If you leave a credit card without any activity for a while the lender will just close the card. So put your lunch on it once in a while. I actually use a particular card that gives me cash back rewards at all restaurants, I use this card to pay for all my lunches throughout the week. And then I pay the full balance at the end of the week. I always remember never to spend more on lunches than what I have in my budget.
4. Don't apply for too many things at once
The weird thing about credit is that if you apply for credit the application or what is called "inquiry" can slightly lower your score. This is ok when you need new credit or it makes sense to get new credit. But having too many inquiries can impact you negatively. That does not mean that if you need a new car you should not run your credit. It just means if you need something use it otherwise don't open credit cards just for fun. Always have a purpose. The negative impact of the inquiry will be far outweighed by a well paid account over time! Don't be afraid to use your credit. The only way to get better is to use it.
5. Watch out for shady lenders and fees
While credit card fees are very common, some lenders use odd tactics to make money. These fees will need to be paid by you and will use some of your utilization ratio.
Annual fees can be normal, just make sure you know about them upfront. These are fees the lender charges to provide you with the credit once a year. They can range from $0-$600 a year.
Monthly fees are not normal, I would not sign up for a card that charges monthly fees.
Late payment fees are normal, but you should not be making late payments anyways.
Look for lenders that are credible, ones that people have rated or even ask your folks or friends.
Follow these tips and your score will be sky rocketing.
