Tips to get the most out of your credit / Ricky Chen

Swipe, tap, insert. These are the three ways consumers can use a piece of plastic, more widely known as a credit card, to complete any transaction. A credit card provides easy access to pay for any item through simple motions that almost feel therapeutic for many. However, not everyone has such a positive outlook on the double-edged sword that is the credit card. On one hand, credit cards allow consumers to effortlessly complete large purchases while simultaneously providing a multitude of rewards upon purchase. On the other hand, improper use of a credit card can completely ruin a person credit; financial life. If the balance on the card is not paid off on time, it will accumulate large interest rates that will leave borrowers struggling to pay off their debt while also incurring the effects of having a worsening credit score. Alternatively, if used correctly, the credit card can provide lucrative rewards such as travel points, cash back, discounts, and a higher credit score.

So how do you use a credit card properly?

For starters, understanding what goes into a credit score is vital to properly using a credit card. A credit score in simple terms is a number that represents your creditworthiness and how likely the credit bureau believes that you will pay back your loans. The score will range from 300 to 850, with 850 being the highest credit score value that you can receive, of which the score will change depending on many factors. These factors include your payment history, credit utilization, length of credit history, credit mix, and new credit.

Payment history takes up the largest portion of a credit score, making up 35% of the total value. It focuses on how many credit payments have been on time and completed in full as opposed to missed payments. Having more missed payments will only negatively impact your credit score depending on the time frame in which they occurred.

The next largest factor is your credit utilization, which essentially looks at how much debt you take out in accordance with your total debt allowance. Factoring for 30% of your score, it is important to use only a small percentage of your total balance. It is recommended to use less than 30% of your available credit. Someone who maxes out all their credit cards is more likely to default or pay off their debt and thus be considered more risky by credit bureaus, while someone who utilizes a small percentage is deemed more responsible with their credit.

The third most important component of a credit credit score is the length of credit history. This looks at how old most of your accounts are, which ends up making up 15% of the score. Having older accounts will yield a better impact on your score as time goes on.

The last two scores, which both make up 10% of credit score, are new credit and credit mix. New credit occurs when a lender pulls your credit report, also known as a hard inquiry, which stays on your report for 24 months. Credit mix is all about diversity and ensuring that there are many different types of accounts open.

Now that you have a general sense of what goes into a credit score, here are some steps to follow as well as advice to ensure that you use your credit card properly:

• The most important step to using a credit card is paying it off entirely before the statement due date. This date can be found within your banking portal. Most apps will have the option to turn on auto-pay ensuring that you do not miss any payments. Since missed payments make up 35% of your score, you want to ensure that you do not get any. To help with this, you should only be making purchases that you know you can afford. A credit card does not add more income, since everything has to be paid off, so you want to make sure that you are only purchasing items you can afford to pay off within a few weeks. This also goes for student loans, as you should be paying off the minimum required monthly payments on them or else they will be considered missed payments, which ultimately will decrease your credit score.

• The next step to implementing proper usage of your credit card is to only use 30% of your credit limit. Spending only a small percentage of your limit reduces the risks of overspending to the point where you are unable to pay back the sum that you spent. If you happen to spend more than 30%, ensure that you are still paying it off entirely before your due date. To increase your credit limit, you should be opening a new credit card once a year. This allows your credit limit to increase while also having new cards with different perks. Depending on your needs, you can open different cards that will give you different rewards whether that is for travel, cash back, or rent. This also helps to increase your credit mix by having different types of accounts open.

While it may seem daunting and overwhelming, using these general steps to servie as a foundational guide along with doing more research will help you be more knowledgeable in the world of credit. Look into the diverse array of credit cards available and the best one to fit your needs and spending habits. Monitor your credit report so you can address any disrepectancies helps ensure everything is correct and up to date. By taking a proactive approach, you are establishing a strong foundation for long term financial well being that will help pay dividends in financial stability.