Using a credit card to improve your credit score
Published Thu, Sep 22, 2016 Updated Tue, Feb 16, 2021
Getting into debt is normally something to be avoided, it is expensive and if you can’t afford what you are buying it is easy to get into trouble. But there are ways of using a credit card to improve your credit score.
Like it or not, borrowing money is an essential part of life – particularly when it comes to big purchases like buying a new car or even a house. If you want to be financially savvy then it is important that you take steps to prove your credit worthiness so that when you do need to borrow money you will be able to get the best possible rates – doing so can save you hundreds or even thousands over a lifetime.
The beauty of credit cards
As you probably know, reliance on credit cards can quickly get expensive and lead you into a debt spiral that is hard to get out of. But credit cards don’t need to be big and scary; when used responsibly a credit card is one of the best possible ways to build yourself a strong credit rating and prepare yourself for whatever your future borrowing needs may be.
Credit card mistakes
How to damage your credit score
To make the best of the opportunity you have to use your credit card responsibly. It is easy to make mistakes that can quickly cancel out your hard work and damage the credit rating that you are trying to improve. Here are the commonest mistakes to avoid:
Going past your credit limit
If you have a credit limit of say £500 then it is important you don’t go past that limit, ideally you should aim not to use more than about 75% of your available balance at any time. Going past your limit by even a pound or two can cause a negative mark on your credit file and can trigger penalty charges.
Paying your bills late
Most credit cards have to be paid each month – either a minimum balance payment or a full payment. Whatever the terms of your card are, make sure you pay on time every time. There is absolutely no reason why you shouldn’t be able to use a direct debit to ensure that you are never late.
Long term balances
Building your credit worthiness is all about using credit and then paying it back; if you get a new credit card, max it out and then leave that balance waiting for months it says little for you being financially responsible – if this is something you are likely to do then be very strict with yourself and keep any credit usage to a minimum.
Use credit cards right
How to improve your credit score
There are two ways to use your card responsibly – pay in full each month or pay in full sporadically. I would suggest the second option, here’s why:
Payment in full
Most credit cards offer 0% for 30 days or some similar arrangement, this means that if you pay off your entire balance each month you will never have to pay any interest. This is a good thing for obvious reasons. Additionally, payment in full also means that you have paid off what you had borrowed and any balance accrued thereafter is new debt that can also be paid off.
The risk with monthly payments (particularly if it is automatic) is that at the end of the month a big chunk of money will come out of your bank account. It is easy to forget about this charge and if you’re not careful a small miscalculation can land you with a big charge.
Credit card power use
My preferred option is to use your credit card frequently and pay it off relentlessly. I pay mine off at least once per week, so that the balance is constantly going from 70% full to paid off. By doing it this way I am constantly aware of my spending and I am constantly showing that I have the money to pay off my debts – this is exactly what banks like to see and it also ensures that I never pay interest or charges.