July 27th, 2012
How to Win the Gold Medal of Credit Card Management
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The 2012 Olympics Games are upon us! For the next 16 days we’ll watch the world’s greatest athletes battle it out for those coveted medals. Just as these athletes have trained for years to perfect their sport, so should you train yourself to achieve good credit health.
When it comes to credit scores, the nation’s average currently stands at a fair 655. That means most of us have a long way to go to hit that coveted perfect score of 850, or even to reach an excellent credit rating of 720 or above.
So where should you start in your journey to gold-medal credit status? Instead of training with barbells and swimming pools, you’ll be using a small rectangle of plastic. When using your credit card, think like an athlete.
Olympic hopefuls wake up at the crack of dawn and train through the day to perfect their performance. While you don’t need to start swiping your credit card at the crack of dawn, getting ahead in the credit game requires some early training.
The other day I asked our Facebook fans to tell us whether or not college students should start using credit. While opinion was split, most commenters agreed that they should only begin using credit cards if taught the proper way to manage credit.
“Being a college student myself, I have five credit cards, a score of 757, and no baddies,” said commenter Hasna S. As it turns out, early credit use can make for early credit success. If you’re a student starting out in the credit world, try a student credit card, which is designed to help college students and young adults build credit while earning rewards at the same time. Check out the Discover More Student Card, which comes with a 5 percent cash back bonus on revolving categories and no annual fee.
If you’re no longer a student, but you still need to start from scratch, a secured credit card might be right for you. These cards require a deposit from you, which is set at your credit limit. They typically come with guaranteed approval, which is great for first-time credit users. Check out the Capital One Secured MasterCard, which will help you establish or rebuild your credit.
Maintain a good balance.
Do you think that Michael Phleps spends all of his training time in the pool? Not a chance. He also trains at the gym with weights and maintains a muscle-fueling diet. The same goes for your credit card use. Relying too heavily on credit will skyrocket one of the most crucial factors of your credit score: your credit utilization rate. This percentage is the amount of your total credit limits you’re using at any given time. If you max out your cards, your utilization rate will be 100 percent, which will negatively affect your credit score.
A healthy credit card utilization rate is 30 percent or less of your total credit limits. There are a few ways to make sure you maintain a low utilization rate:
- Ask for your creditor to increase your credit limit. Some credit card issuers will review your account after six months or so of credit use and automatically increase your credit limit. But it never hurts to pick up a phone and ask for an increase if you haven’t had one recently. Just keep in mind that this can sometimes prompt a hard inquiry.
- Pay off your credit card more than once a month. If you have a low credit limit, it can be difficult to maintain a balance lower than 30 percent. To make it easier on yourself, each time you make a credit card purchase, make a payment to your credit card to reduce the balance. Or make it a point to pay off your card twice a month, instead of just once.
- Know your number. The best way to maintain a healthy utilization rate is to simply know what 30 percent of your credit limit is. Do the math, and keep that number in mind every time you make a new purchase. If a credit card purchase will put you over the 30 percent limit, pay with cash or skip the purchase altogether.
Always be training.
Olympic-level athletes take very few training breaks. It’s difficult to maintain elite athlete status if you’re constantly taking breaks. In a way, the same goes for your credit card use.
Did you know that if you stop using a credit card, it could eventually be marked as “inactive” by the credit issuer? While the issuer might not close the account, they may discontinue reporting it to the credit bureaus. This could shorten your age of accounts and increase your credit utilization rate, since that card’s credit limit will no longer appear as “available credit” on your credit report. Just as athletes’ muscles begin to atrophy after discontinuing training, so can your credit score if you stop using your credit card.
As a simple solution, set up a recurring payment to your credit card, like a gym membership or monthly cable subscription. You can also set up automatic payments from your banking account to your card to cover the credited charge. That’ll keep you from using your card too much, but keep some minimal activity on your card.
Training for a good credit score shouldn’t be as difficult as training for the Olympics, if you start early enough, maintain a good balance, and keep at it. How do you train yourself for smart credit card use?
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