The Best Things to Charge on Your Credit Card When You’re Rebuilding Credit

Charging a few small, easy-to-pay-off items to your card each month can help you rebuild credit.

If your credit needs rehabilitation due to late payments, accounts in collections or other negative items, it might be time to rebuild. Rebuilding your credit requires an understanding of your current situation, identifying past mistakes and implementing the right strategies going forward.

Wise use of a credit card is one way to start. Surprising, right? But if you use that plastic correctly, it really can help you. Good credit card strategies include keeping a low balance, making payments on time and paying your balance in full each month. To do that, it’s best to start small and only charge things that won’t kill your credit building project before it takes off. (You can check on your progress with a free credit report snapshot on Credit.com.)

Here are a few things you can charge on your credit card to help you boost that score.

Gas

The cost of gas can add up, but if you already have room for gas in your monthly budget, you can charge your gas expenses and pay them off in full using the funds in your bank account. Some credit cards offer special cash back rates on gas purchases so you can earn a little money back in your wallet (although getting a new unsecured credit card might not be the best move for you at this stage as the inquiry will cause your score to take even more of a hit).

Groceries

Groceries are another staple you likely already have built into your budget. Instead of handing over cash or a check when you pick up the necessities for the week, charge your groceries to your credit card and pay those purchases off in full each month. There are several credit cards on the market that offer special cash-back rates on groceries, as well.

Streaming Services

Monthly streaming services usually cost less than $20 a month. You could conceivably set up your credit card to pay for a streaming service, pay it off in full each month and never use it for anything else.

Balance Transfers

If you have a large balance on a high-interest credit card, it could be damaging your credit score and affecting your ability to make your payment. If you have a lower interest credit card, you can transfer the balance and reduce the interest. If you can qualify, a card with a long 0% intro APR period can help you pay your balance off interest-free.

(Cheap) Dining & Recreation

It’s probably not a good idea to use your credit cards at the club or restaurants, as it’s easy for costs to spiral out of control. But if you’re on a date at the movies or taking the kids out for mini golf and milkshakes, low-cost dining and recreation purchases might be a safe bet.

Small Everyday Expenses

Sometimes you have to run into a local store for a roll of duct tape or some socks. Small everyday purchases can be fairly easy to pay off in full.

Using Your Credit Card Wisely to Build Credit

For the most part, small purchases you can afford to pay off each time the statement arrives are the best things to put on your credit card, as payment history is the biggest influencer of your credit scores. Plus, carrying a balance means you’ll be hit with interest and it will take you longer to pay down your balance.

But even relatively small purchases can threaten your credit if they pile up too quickly. (Credit experts recommend keeping your credit utilization ratio — that is, your amount of debt in relation to your credit limit — at 30%, ideally 10%.) So, a good practice is to treat your credit card like cash and only purchase things you can cover with available funds.

Have any questions about improving your credit? Ask us in the comments below and one of our credit experts will do their best to help.

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The post The Best Things to Charge on Your Credit Card When You’re Rebuilding Credit appeared first on Credit.com.

Here’s What You Need to Know About Credit Utilization

Credit scoring is a mystery to many people, and for good reason. It’s not easy to understand the grading process or which factors matter most.

Credit scoring is a mystery to many people, and for good reason. It’s not easy to understand the grading process or which factors matter most.

While every lender has its own method for deciding which customers are worthy of financial trust, more than 90% of top U.S. businesses rely on the FICO score when reviewing credit and loan applications, according to the company. Of course, you have more than one FICO score, so you might be feeling confused all over again, but here’s the good news: When it comes to credit health, it’s best to narrow your focus to five main factors:

  • Credit length
  • Payment history
  • Account diversity
  • Inquiries
  • Credit utilization

Why Is Credit Utilization So Important?

Every factor of credit scoring is crucial, but credit utilization is responsible for 30% of your overall score, second only to your payment history’s weight of 35%. Credit utilization measures your revolving balances against your total credit limit. Lenders and credit card issuers rely on credit utilization to predict risk and future behavior. In general, the higher your utilization ratio, the greater your risk of defaulting on your balances. Risky behavior isn’t rewarded in the world of credit scoring, and you may see a decrease in your scores as your utilization ratio goes up.

To understand credit utilization, you first need to understand your line-item and aggregate calculations.

Line-Item Utilization

Line-item utilization measures your individual credit card balances against your individual limits. For example, suppose you have three credit cards, each with a $10,000 limit. Based on your current balances, your line-item utilizations break down like this:

Card A: Balance of $4,500 / Credit limit of $10,000 = 0.45 × 100 = 45% utilization

Card B: Balance of $2,000 / Credit limit of $10,000 = 0.20 × 100 = 20% utilization

Card C: Balance of $3,300 / Credit limit of $10,000 = 0.33 × 100 = 33% utilization

Aggregate Utilization

The average of your credit card utilizations is called aggregate utilization. Calculate yours by combining your current balances and dividing them by your total credit limit. In the example above, your total balance is $9,800 and your total limit is $30,000; therefore, your aggregate credit utilization is $9,800 / $30,000 = 0.32 × 100 = 32.6%

Which One Matters?

Line-item and aggregate utilization are both important factors in overall credit health, and FICO recommends keeping yours as low as possible.

How to Benefit from Credit Utilization

Credit utilization has an undeniable affect on your credit score, and there are ways to harness its influence in your favor. (Not sure where your credit stands? You can view two of your scores for free on Credit.com.)

Keep Your Balances Low

If you struggle to curb spending or rely on credit cards to make ends meet, overhauling your budget is the first step. A few monthly changes could help you avoid overwhelming debt and related credit damage.

Check Your Credit Reports for Accuracy

Your credit reports tell the larger story of your financial history and responsibility, and accuracy is key. For example, suppose Card A’s $10,000 credit limit is mistakenly listed as $6,500 on your credit reports. While it may seem like a small issue, an incorrect credit limit can alter your utilization ratio and damage your credit score in the process. In this case, your line-item utilization would increase from 45% to 69.2%, and your aggregate utilization would increase from 32.6% to 37%. You can’t afford to ignore the details. Order free copies of your credit reports to ensure that they accurately reflect your credit card balances and limits.

Request a Limit Increase

If you’re working on debt reduction but need a quick fix, consider asking your lenders for limit increases on each of your cards. For example, increasing Card B’s limit to $15,000 would lower your line-item utilization from 20% to 13.3%, and your aggregate ratio from 32.6% to 28%. Requesting a limit increase could place a hard inquiry on your credit file, costing your score a few points, but the benefits of lower credit utilization are usually worth the temporary ding.

Change Your Bills’ Due Dates

It’s difficult to benefit from credit utilization if you are constantly battling the clock. If your credit card issuers report customer balances to the credit bureaus before you pay your bill, it may seem like your utilization ratio is constantly high. The fix? Contact your issuers and ask them when they typically report to the credit bureaus, and then move your bill’s due date to the week before. This strategy allows you to take full advantage of low credit utilization by giving you time to pay your balances before the reporting date.

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6 Things to Do If Your Credit Card Balances Are Creeping Up

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About half of all Americans use their credit cards strictly as a method of payment, avoiding interest charges by paying each statement balance in full. The other half will frequently (or always) carry a balance on their credit cards. And while most credit card users will tell themselves that they have their debt under control, some will eventually become worried when their balances keep growing.

Since it’s considered unsecured debt, credit card interest rates are usually higher than other types of financing such as car loans and mortgages. And since credit card interest payments are never tax-deductible, letting your balance grow can be extremely costly. Furthermore, having a high credit card balance will raise your debt-to-credit ratio, and can hurt your credit score. With a lower credit score, you will receive less favorable interest rates when applying for other financing. Therefore, it’s vital that you control your credit card balances before they begin to control your personal finances. (You can see where you credit stands by viewing your two free credit scores, updated every 14 days, on Credit.com.) 

If your credit card balances are creeping up and it’s starting to creep you out, consider these six things.

1. Go On a Diet

Eating less won’t necessarily help you cut your credit card balance (unless you eat at restaurants a lot), but it can make sense to go on a spending diet. Start by cutting out all unnecessary expenditures, while postponing essential purchases for as long as possible. Then, look for ways to save money on all your essential purchases. 

2. Increase Your Monthly Payments

One of the worst mistakes that you can make with your credit cards is to only pay the minimum balance. When you pay just the minimum, it can take years to pay off your credit card debt, even if you don’t make any new charges. In fact, you should be paying as much as you can in order to lower your interest charges and pay down your balance as soon as possible.

3. Make Your Payments Sooner

Just because your statement shows a due date a few weeks in the future, doesn’t mean that you should wait that long to make your payment. Credit card interest is calculated based on your average daily balance, so you will save money by making your payments as soon as you can.

4. Make More than One Payment Each Month

Another way to pay down your credit balances faster is to make multiple payments each month. For example, you could choose to make a payment twice a month after you receive your paycheck, or anytime you receive a significant amount of cash. When you do this, you will reduce your average daily balance with each payment, which will lower your interest charges.

5. Use a Different Method of Payment

By design, credit cards make it easy to spend money you don’t have, which enables some people to get carried away. If this is happening to you, it might be time to store your credit cards in a secure place and temporarily start using cash, checks or debit cards. Some people put their cards in their sock drawer, but others will lock them in their safe or even freeze them in a block of ice.

6. Consider a Balance Transfer

The biggest problem with a high credit card balance is the interest charges that you face. Thankfully, there are credit cards that offer 0% annual percentage rate (APR) promotional financing on balance transfers that last from as little as six months to as long as 21 months. When you open a new credit card account with one of these offers, you can transfer your existing balances to that account and avoid interest charges during its promotional financing period. When the promotional financing expires, the standard interest rate will apply to any unpaid balance. Just be aware that most credit cards with 0% APR promotional financing offers will apply a 3% to 5% balance transfer fee to the new balance.

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4 Reasons Your Credit Score Isn’t Improving

credit-score-isn't-improving

We hear it from readers constantly: I’m paying all my bills on time, so why isn’t my credit score going up?

This feeling that you’re doing everything right and not getting rewarded for it is one of the most frustrating things about credit scores. And the simplest answer to that question is almost as frustrating: It depends.

First of all, credit scores are the result of complicated formulas, so that makes it difficult for the average person (even personal finance writers) to pinpoint exactly why your score is the way it is. On top of that, there are dozens of credit scoring formulas, and you can’t keep track of all of them. Finally, and here’s the really important part, everyone’s credit history is unique. Without looking at your credit report, a credit expert can’t say exactly why your score isn’t changing.

In general terms, there are a few things that could be causing your credit score to stagnate. Here are four of them.

1. Your Credit Card Balances Are Too High

Payment history has the greatest impact on your credit scores, but making on-time payments alone won’t give you a good credit score. It’s certainly important, given how much a late payment can hurt your credit score (it can knock about 100 points off your score, depending on what else is in your credit history), but there are four other major factors that affect your score. The next-most important (after payment history) is your amount of debt.

The key is to keep your revolving credit balances (like credit card balances) as low as possible. This relates to credit utilization: Your revolving credit accounts generally have limits, and the closer your credit balances are to those limits, the higher your utilization. High utilization, in which your debt is more than 30% of your available credit limit, will keep your credit scores down.

“I think it’s common for a high credit card balance to keep scores [stagnant and low],” Jeff Richardson, a spokesman for VantageScore Solutions, said in an email. “Consumers will and should expect their scores to increase as a delinquency gets older and older, but if they still have a high utilization, it’s certainly possible that the score can only rise so much until they pay down the balances on their card(s).”

2. Something Seriously Negative in Your Past Is Dragging You Down

Perhaps you’re paying debts on time and keeping your credit utilization low. In that case, you may want to look at other aspects of your credit history. If there’s something exceptionally negative in your credit history, like a bankruptcy or foreclosure, it can take many years for your score to recover. Most negative information can remain on your credit reports for up to 7 years, so while you wait for the effect to lessen over time, it can help to focus on what you can control: making payments on time and keeping your credit utilization low.

3. You’re Missing Something Important

Though they are the most influential factors in your credit score, on-time payments and credit utilization are not the only things that determine it. How often you apply for new credit, the length of your credit history and the mix of accounts in your file also play an important role in credit scoring.

There’s not much you can do about your length of credit history other than exercising a lot of patience. The longer you’ve been an active credit user, the better your score will theoretically be, but there’s nothing you can do to speed up time. One of the best tips on this topic is to keep your oldest credit account open, because your credit age is an average of your accounts’ ages. You may have a good reason for closing an old account, but it’s a decision you shouldn’t make lightly.

As far as mix of accounts goes, you would ideally have active installment and revolving accounts to show that you’re capable of responsibly managing different kinds of credit. Sure, you may be doing a fantastic job paying your credit cards on time and keeping their balances low, but without any active installment loans, that’s only going to do so much for your credit.

Staying on top of just one credit account can be challenging, although doing that well can give you a great score. Mix of accounts is a small part of what determines your credit scores, so opening up a new credit account solely for the sake of your credit score doesn’t usually make much sense, especially if you can’t manage it and wind up in debt.

4. There Are Errors on Your Credit Report

When’s the last time you checked your free annual credit reports? It’s a smart thing to do regularly, as you can spot errors that could be keeping your credit score lower than it should be. If you find an error on your credit report — that can be anything as little as a misspelled name or as problematic as a wrongful late-payment notation — you can dispute it with each of the credit bureaus reporting the wrong information.

If you find several problems or are overwhelmed by the task of trying to fix your credit, you can hire professionals to help out. Keep in mind, anything a credit repair company does, you can do yourself for free. Also, make sure to research any companies you’re considering. A legitimate credit repair company will not promise a specific jump in your credit score, which is illegal. (You can learn more about how credit repair works here.)

It’s also a good idea to check your credit scores regularly. You can see two for free, updated each month, on Credit.com. Viewing these can help you track changes in your credit scores and let you know if and how you should adjust your behaviors to build good credit.

[Offer: If you need help fixing errors on your credit report, Lexington Law could help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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