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How Credit Card Use Affects Your Credit Score

How you use credit determines what your credit score will be. In short, your credit score is a compilation of all of your credit use over your lifetime. It is a record of everything you do using credit. This includes applying for and using loans, credit cards, mortgages, vehicle loans and much more. If you want to have a high credit score, you need to have the ability to use credit wisely. The better the financial decisions you make are, the more likely you are to get more credit in the future, and with lower interest rates.

The Development of Your Credit Score

Often times, people do not realize the sheer impact of the credit decisions they make. However, every time you pull out a credit card, you are affecting your credit. Here are a few ways this can happen.

  • The more debt you have, the lower your score will be.
  • If you go over your limit, this affects your score negatively.
  • If you pay off your credit card, this gives your credit score a boost because you are reducing your debt to income ratio.

The development of your credit score happens over time. The up and down movement of the actual number changes with the actions you make, usually on a monthly basis. Before you pull out that credit card, it is a good idea to know what the impact actually will be.

The Benefits of Good Credit

Why does it matter? Why should you care how using credit affects your score? There are actually many reasons to work towards improving your credit score. Here are a few of them.

  • With a higher credit score, lenders see you as less of a risk. They are then willing to provide you with more credit than to someone who does not have a good score.
  • With a higher score, you also are able to get lower interest rates. That means you pay less when you have to borrower or use credit.
  • Employers look at credit history to see if employees are responsible and able to meet their financial obligations.
  • Car insurance rates and qualifications can be based on credit scores, too.
  • If you want to buy a car, buy a home or start a business, you need a good credit score if you plan to use credit to do so.

For all of these reasons, individuals need to ensure their credit score is high, or as high as possible. The good news is that this number is not set in stone – it changes over time and can always improve with better financial decisions.

Purchasing Habits that Lead to Good Credit History

Good purchasing habits can help you to build a strong credit score. If you want to have access to lower interest rates and better terms for your next loan, it is best simply to consider making better decisions with your purchasing. Here are some tips to help you to do just that.

  • Buy what you need, not what you want on credit. Avoid using credit to buy things you simply do not need – it ends up running up your debt, which negatively affects your credit score.
  • Buy what you can pay for in a month. The best way to use credit cards is to pay the balance off in full each month. That way, you do not carry a balance month to month, which leads to lower credit scores.
  • Do invest in secured credit, too. Credit cards are not the only type of debt that affects your score. In fact, secured loans, such as those on a car or on a mortgage, are one of the best ways to increase your credit score over time.
  • Do use credit. If you do not use credit, you cannot improve your score unless you work on paying down your debt.

Make wise decisions before you use that credit card for any purchase. Ask yourself, “Will this purchase be something I can pay off in a short period of time? Do I need it? What will be the impact in the long term?”

Purchasing Habits that Damage Your Credit History

Many things you can do will negatively influence your credit score. Here are a few things to avoid.

  • Do not fall for the “if you open a credit card with us today, we’ll save you 10 percent on your purchase” line. The fact is, most lenders charge a significant amount of interest on store credit cards. You will pay more in annual memberships, interest charges and fees than you will save on your purchase.
  • Do not run up the balance on your credit cards every month. The fact is, the higher your debt load is the lower your credit score will be. It is a good idea to keep your balance 20 to 30 percent under your limit.
  • Do not go over the limit with purchases. Avoid making purchases that are too near to the limit. It will cost you in the long term.
  • Avoid using credit cards for purchases if you can use cash. It costs less in the long term and it keeps you honest. Your credit history will be better if your debt limits are lower.
  • Avoid not thinking about those purchases before you make them. If you plan to purchase something on a credit card, know that the actual cost is not just the price you pay the merchant, but that cost plus any interest charges you will pay.

Should you use credit cards? You most certainly should since using credit is the best way to boost your credit score. However, avoid making purchasing mistakes like those listed here. In short, you want to ensure you have the best possible way to increase your ability to make a purchase while reducing your risk of making future purchases more expensive because your interest rate is on the way up. You can do something about it – make wise purchasing decisions.

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