Written By: Leah Chester-Davis & Carrie Barnhardt
Credit cards often get a bad rap. There are lots of stories out there of how spending gets out of control and people are buried under debt and high interest rates. On the flip side, credit cards can be an important tool. Used responsibly they can help you build a credit history that demonstrates you are responsible and have a good track record of making payments on time. For younger folks who are just starting out, it can mean qualifying for a loan while those with no credit history may be out of luck.
The key is to not yield to temptation. Know the amount of disposable income you have each month and don’t spend more. Pay your bills on time. If you rack up more on your card than you can reasonably pay off every month, try to limit spending and pay more than the minimum due to cut down your balance as quickly as possible. By responsibly using your credit card, you will be on your way to building a good credit score and credit history.
A good credit score and credit history give you a greater chance in obtaining loans for big purchases such as a car, home, or property. They also help you obtain the loan at a lower interest rate when you can demonstrate you’re reliable at making your payments on time.
When you know you can responsibly handle credit card payments, consider adding a second credit card to use only for certain purchases, like gasoline, for example. It may sound counterintuitive but responsibly handling more than one credit card can actually help you increase your credit score, explains Carrie Barnhardt, loan officer in the Concord Branch of Carolina Farm Credit. “I’m not saying to open a ton of cards just so you can go into more debt but having credit availability spreads out your debt to credit ratio and that is something we look at.”
Consider this example:
Say you have a credit card with Store A and you have a $5,000 line of credit. You spend $4,000. If you divide your $4000 debt by your $5000 line of credit, your debt to credit ratio is not so good and your credit score will start to go down because you are close to maxing out your card. If you open another credit card with a $5000 line of credit and you don’t spend anything on it, you now have a $10,000 line of credit. If you divide $4,000 by $10,000 you are balancing out the ratio on how much you have spent versus what your credit line is.
Barnhardt explains that is one way to use credit to help spread out your ratio to improve your scores. She acknowledges that this approach is only successful for those who are responsible in paying off their credit card debt in a timely manner without racking up huge balances and the resulting large interest charges.
“I advise people who have just one credit card or auto loan to maybe get a second credit card just to spend for gas, for example, so that it spreads out your ratios a little bit more to improve your credit scores. Just be sure to make timely payments and avoid accruing large debt. If you can’t do that you may need to avoid using credit cards.”