How to establish good credit with a credit card

How to Establish Good Credit using a Credit Card

It takes time to establish a good credit history, it doesn’t happen overnight. But you can get started by applying for a credit card, and using it wisely, which can help you on your way to having an excellent credit rating. Follow these simple steps to get started:

  1. If you don’t already have one, apply for a credit card, in your own name.
  2. Usually when you receive the card in the mail, you will need to call and activate it. Generally this is a quick, automated process.
  3. Put some charges on the credit card, but be careful not to charge more than you can actually afford on a monthly basis.
  4. Pay your balance in full each month, from your checking account – online bill pay is now available from most credit card issuers.

Applying for a credit card is usually the easiest part. A credit card of your own is often easy to obtain, even if you have little or no credit history. Activating it is very simple as well, and usually only takes a minute. Now comes the tricky part, managing the credit card wisely.

Managing Your Credit Card Wisely

When trying to establish your credit history using a credit card, you must be very careful how you manage your newly found credit line. I learned this lesson the hard way, my first credit card had a $5,000 limit. I applied for, and received this card shortly after I turned 18. I used this card sparingly at first. Then, to make a long story short, I ended up charging things here and there like gas for my car, and various other purchases, and not paying the balance off each month. Basically I was being very careless with my credit line. About a year and a half after I received the card, I had maxed it out. Yes, at this point I was in debt almost $5,000 to a credit card company, on one card! It happened so fast I hardly even knew it before the debt was already looming over me. At the time, being about 20 years old, and not having a lot of income – $5,000 in credit debt seemed like a mountain to me.

At first, I was only able to make the minimum monthly payment, which was somewhere around $115/month. Since many credit cards carry an outrageously high interest rate (mine was about 21%), about 90% of the payment was going to interest alone. That means if I only paid the minimum payment, it would’ve taken about 7 years to pay off that debt. And in the end I would’ve paid around $4500 just in interest! That’s in addition to the $5000 debt I already had on the card. So add that up and that original $5,000 of credit card debt would’ve cost me almost $10,000 over the 7 year span that it would’ve taken me to pay off the debt, by making the minimum payment.

So what happened? Well, I got smart, worked hard, and organized my finances in a way that I was able to pay off the debt in about 2 years, instead of 7. It was not easy though, and it still cost me thousands in interest. By the time I started paying down this credit card debt, I had some additional credit cards with high balances on them as well, which when added to the original $5,000, came to a total of almost $10,000 in credit card debt. Talk about a looming mountain! It was so overwhelming, there was even a time when I was considering the possibility of bankruptcy.

Not only can debt such as this become a burden in itself, too much credit card debt can, and will, lower your credit score. With a low credit score, it gets increasingly difficult to get approved for any new credit (such as another credit card, auto loan, personal loan, etc.). In fact, having this debt lowered my credit score so much that I could not even get approved for a lower interest credit card to transfer my balances to. So I had no choice but to sit there and pay the high interest rates of the cards I already had.

Moral of the story?

Manage your credit wisely in the first place, and don’t get yourself into a position like I did! Many people make the exact same mistake I made, and are not able to pay off the credit card debt as quickly, or for some people, not at all.

Pay your balance in full each month

Don’t just pay the minimum payment and think to yourself “No big deal, I will just pay it off later”. Chances are, “later” may never come and your debt will remain, and even get larger if you continue to make charges on the card, if you don’t pay the bill in full each month from the start.

Secured Credit Cards – The Alternative

If you are unable to obtain a credit card of your own, or you want to avoid the temptations of maxing out your credit card, with the possibility of not being able to pay it off, consider applying for a Secured Credit Card. A secured credit card requires a cash collateral which then becomes your credit line for the account. It’s similar to opening a checking or savings account, you will not be able to charge more than your cash deposit. For example, if your bank approves you for a secured credit card, and you put a $500 deposit on the account, you will only be able to charge up to $500 on that secured account. With this type of credit card, you can usually add more money later if you use up your initial deposit.

The benefit of having a secured credit card account over writing checks or using a debit card, is that it is normally reported to the credit bureaus, and will help you in building a good solid credit history. Go to your bank and ask them about opening a “Secured Credit Card Account”, and be sure to ask them if the account will be reported to the three major credit bureaus (Equifax, Experian and Trans Union). If they do not report the account to the credit bureaus, then the main benefit of this type of account (in an effort to build a good credit history), is completely lost.

Check your credit report and score

After you have begun your quest for “good credit”, make sure you check your credit report and credit score on a regular basis, and be diligent about maintaining good credit. If you do this, you will have an excellent chance of having a successful journey!

Also, if you haven’t already, don’t forget to check out our article on how to get a totally free credit score.

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