Mr Credit Card
So you are all psyched to start rebuilding or rebuilding your credit card and you've just got your first secured credit card arrive in the mail. But before you use it, here are ten important tips to help you use your card wisely to fast track your way to a better credit score.
1. Have enough credit line (or deposit) for your use
I mentioned in our previous post about deposits that you should put enough deposit so that you will have a high enough credit limit to use your secured card that way you want to use it. You should aim to have a limit with room to spare in case of emergencies where you need to spend more than usual.
Many of you can only start small and that is ok. Most credit card issuers allow you to start with a deposit as small as $200 to $300. If that is all you have now, then start small. But as you save up more, increase your deposit because a large limit and using your limit sparingly helps your credit score.
2. Use only part of your credit limit
Imagine you have a $1,000 deposit and credit limit on your secured credit card. And every month, you charge over $900 to your card. What would the credit bureaus think of you? They might be thinking along the lines of : "Wow, this person has a $1,000 but he uses close to his/her limit on the credit line. They pay in full, but what happens if he or she loses their job, will they be in trouble?" Well, that is how it might look to the credit bureaus.
But imagine you have a $1,000 credit limit. But instead of $900, you charge only $200 to your card. Credit bureaus will be thinking along the lines of : "Wow, this person has a $1,000 credit limit but is only using $200. He/She appears conservative in terms of how they manage their credit and they are giving themselves a lot of cushion if they come up to unexpected expenses".
If you were had a choice of lending to either these two borrowers, who would you lend to? Chances are that you will pick the second person. And for good reason too. The person who uses only a small portion of their credit line appears to be more prudent. In the credit world, this is called credit utilization ratio and is one of the most important factor in determining your credit score. A good range would be anywhere from 10% to 30%. That means if your credit limit is only $200, use no more than $20 to $60 a month on the card.
3. Pay on time
Paying on time is perhaps the most important factor in your credit score. If a late payment is reported in your credit report, your score is going to drop a lot. In fact, if you are a rebuilder, your score tanked most likely because you cannot make your payments.
If you are late by a day, your credit card issuer isn't going to report to the bureaus straight away but you will be hit with a late fee. And if you are consistent late by a day or two, your credit card issuer will notice that and will be more reluctant to graduate you to an unsecured credit card.
4. Pay in full
Aside from paying on time, I would highly recommend that you pay in full every month and do not carry a balance. This is a good habit to have regardless of whether you are building your credit, rebuilding it or even if you have excellent credit.
Paying in full shows that you never spend more than you earn and that is a fantastic money habit to have. It teaches you to save to buy a big ticket item and forces you to evaluate what you can afford today rather than simply taking the easy way out by taking on credit.
Furthermore, if you pay in full, you never have to pay any interest to your credit card issuer. That saves you money in the long run.
5. Pay more than once a month
This tip is a little controversial. The theory goes like this. Although you may pay in full every month (which is good), your credit card issuer may report to the credit bureaus on a date in which you have not made your payment and it MAY reflect a high utilization ratio. This situation normally arises when your credit utilization ratio is high. Or in layman terms, you used a high portion of your available credit limit. If you are using a large portion of your available credit, then one way to have that look better on your credit report is to pay twice a month. In fact, issuers like Discover have even suggested as much. However, bureaus like Experian have said that paying more than once a month has no bearing on your credit score at all.
My personal experience has been that I always pay in full and only once a month (all my payments are set to autopay). As far as I can tell, this has not affected me as I have a 800 plus score.
6. Set Up Autopay
I advice every credit card holder to set up autopay. There are three modes in your setting. You can set up autopay to pay in full, pay the minimum or pay a fixed amount. I would suggest setting it to pay in full as a best practice.
Setting up autopay sets you free from worrying if you have sent the check or not. You will never be late as long as you make sure there is enough cash in your bank account.
There are some folks who are uncomfortable with autopay because it causes them to be less diligent in check their statements. Many people like to check their paper statements to make sure that their statements are correct before writing a check. However, setting up autopay should not prevent you from checking your statements when it arrives in the mail or you can simply check online. Alternatively, you can follow our next suggestion.......
7. Set Up Alerts
You should set up alerts on your credit card account. That way, you can be alerted to every transaction that you made on the card. This is very important because if there is a fraudulent transaction and you have alert notifications sent to you, you could spot it straight and alert the credit card company.
8. Download and Use The App
Almost every bank has an app now. Some are good, some are just ok. But I would advise you to download and use them. Apps are perfect for setting and getting your alert notification (after all, who does not check their phones). Most apps allow you to pay your bills, check your balance and even check your credit score (if your issuer has that feature).
Having the app at your fingertips (and cell phone) also encourages you to be more on top of your accounts because of all the alerts you will get. And for those of you who never like to set up autopay because it might cause you not to check your statements, having the app on your phone might just be the cure for that.
9. Set up your payment date to suit your cash flow
Many issuers now allow you to set up your own payment date. And you should take advantage of that. You should be aware of when your pay check or pay stub arrives and set your payment dates according. You want to set it up in such a way that you never run the risk of being low in your bank account balance.
Ideally, you will have a large enough of an emergency and never have to face this problem. However, if money is tight, then setting a payment date to match your cash flow will help a lot.
10. Beware of payment holds
This is not usually a problem for most folks but it can arise with certain issuers. Say you have a $1,000 deposit and credit limit. You charge $500 to your card and pay it off in full by your due date. Even though the credit card issuer has received your payment, they may hold it and so instead of your credit limit returning to $1,000, it might stay at $500 for a few days (sometimes as long as 10 days). So if you go out and put $600 on the card, you may get declined.
Most issuers will clear your payment within 24 hours or 1-2 days. Some might take longer. Just be aware of how your credit card operates. Check online or your app for your latest limit and.
What's Next
How fast can secured credit cards build credit?
How many secured credit cards do you need to build credit?
What is a secured credit card and how does it work?
Pros and Cons of Secured credit cards
How does deposits on secured credit cards work?
What should a typical deposit be on a secured credit card?