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Debunking the myths: 7 facts about credit cardsDoes paying less than the minimum count as a missed payment? Should you avoid having a high credit limit? Knowing the facts can help you make smart choices. 1 You might have heard that it’s only after you use a new credit card that the account affects your credit score. However, applying for new credit comprises 10 percent of your credit score. It doesn’t matter if you’re approved for the card or if
you use it; it’s the inquiry that counts. Frequently applying for new credit can hurt your credit score, so make sure you really need that new card before you apply for it. 2 If you don’t pay the total minimum payment on
your credit card bill, your credit card company may report it as a missed payment. This can bring down your credit score and make it more difficult to qualify for credit in the future. Check your statement for the minimum amount due, and be sure to pay it on time to keep your account current. And remember: Paying more than the minimum amount due is a great
way to pay down your debt—and until you pay it off, interest will continue to be charged each month. 3 Your account may include balances with different interest rates (such as one rate for a balance transfer and another for a cash advance).
And that points to another good reason to pay more than the minimum due: When you do, your card issuer has to apply any amount above the minimum to the balance with the highest rate—which can help you reduce that higher-rate debt more quickly, saving you money, according to Experian. 4 You might accrue interest even after you’ve reduced your balance to zero. This is called residual interest, and it’s due to the gap between the date on which you’re billed and the date you make your payment. To avoid residual interest, call your credit card issuer and request
a calculation of the exact amount owed on the date you expect your check to arrive or your online payment to process, and pay that amount. 5 If you manage your credit cards wisely, a high credit limit can be an advantage. Thirty percent of your
credit score is based on your debt-to-credit ratio (the amount you owe in proportion to your total credit limit). If you have a high credit limit and you keep your balances low, your debt-to-credit ratio is also low, which can help your credit score. 7 Having more credit cards isn’t necessarily better. Ten percent of your credit score is determined by the type of credit you have. For example, you may have student loans, a mortgage and credit cards. Credit agencies look for a good mix. If all you have is credit cards, you may not help your score. Now that you have a good handle on the basic facts about credit cards—as well as the most common misconceptions—you have the tools to better manage your credit and build a strong credit history. If you’re considering a credit card, learn more about Bank of America’s credit card options. More from Bank of AmericaInsider's experts choose the best products and services to help make smart decisions with your money (here’s how). In some cases, we receive a commission from our our partners, however, our opinions are our own. Terms apply to offers listed on this page.
LoadingSomething is loading. Thanks for signing up! Access your favorite topics in a personalized feed while you're on the go. Building good credit from scratch can seem intimidating, but all it really takes is time and smart habits. There are a few ways to build credit, but you can start small by using a credit card. Here's how it works: Become an authorized userOne of the easiest ways to establish credit from nothing is to become an authorized user on your parents' or partner's credit card. An authorized user is basically an extension of the primary cardholder, but isn't responsible for paying the bill and doesn't have to undergo a credit check. But as an authorized user, your credit report will track the credit card's payment and utilization history, so it's important to choose someone who is financially responsible. Try a secured credit cardYou may try a secured credit card to start building credit on your own. With a secured credit card, you make a cash deposit to a bank or financial institution to establish a line of credit and then use the card to make purchases up to that limit. When you pay the bill each month, the bank will report your payment activity to the three credit bureaus, Equifax, TransUnion, and Experian, which will each establish a credit report in your name. If the bill ever goes unpaid, the bank can keep your deposit. If you pay on time consistently, you should eventually qualify for a non-secured card and may even be upgraded by your bank. Apply for a credit card with good rewardsOnce you've established your credit score, you're probably ready to apply for your own credit card. Any credit card worth having these days will come with a suite of benefits and rewards, whether it's bonus points, cash back on qualified purchases, or travel perks. Some premium credit cards levy an annual fee as high as $550, but there are many great, no-fee credit cards to choose from. You can apply for a credit card online and the bank will perform a hard inquiry on your credit report. It usually only takes a few minutes to get approved, unless the bank needs to verify your income. Be sure to familiarize yourself with any bank-specific application rules and restrictions before you sign up for a card. Check your credit limitWhen the bank approves you for a credit card, it will set a credit limit based on your income and other factors in your credit report. The amount of your total available credit limit that you spend each month becomes your credit utilization rate. You want to aim for a credit utilization rate of 10% or less to maintain a good credit score. The more lines of credit you have, the easier it gets. If you consistently keep your spending below the limit and make on-time payments, the bank may automatically increase your limit. You can also call and request a credit limit increase. Know your payment due dateBefore you start swiping your credit card, you should know when your monthly payment is due. This will be listed on your online account and is the date that your full outstanding balance is due every month to avoid late fees. Know your annual percentage rate (APR)Every credit card has an APR, or annual percentage rate, which is the percentage of your outstanding balance you'll be charged for keeping a balance on the card past the payment due date. The APR on a credit card depends in part on your credit history and can range from 17% to 26%, though some cards offer introductory APRs as low as 0% that last for a few months after opening the card. Some banks raise your APR if your payments are late. Ideally, you shouldn't be concerned with the APR if you plan to make full and on-time payments on your credit card. But it's still smart to choose a credit card with a low APR in case you do end up carrying a balance at some point; high interest rates can quickly snowball your debt. Use the card to make purchasesIf you opened a rewards credit card, start using the card to make purchases that will earn you points, miles, or cash back. Even if you're not earning rewards, it's important to use the card to build your relationship with the issuer. Little or no account activity could result in the bank reducing your credit limit or closing the account, and your credit score could drop as a result. When you use a credit card instead of a debit card, you'll also be better protected in the event of fraud. Some cards even offer built-in travel insurance or purchase protection benefits, which you don't get when you pay with cash or debit. Make a habit of checking your transaction historyWhen you're swiping a card rather than handing over cash, it can be easy to lose track of how much you've spent. Get in the habit of checking your transaction history once or twice a week to make sure you're not creeping too close to the credit limit. This is also a good practice to protect yourself against credit card fraud. Even though you aren't liable for fraudulent charges, it's a lot easier to correct a problem if you catch it right away. Pay off the balance in full every monthEvery month, you're responsible for paying off at least the minimum payment on your account. If you don't make your payment on or before the due date, your account will start accruing interest until it's paid, you'll get a late fee, and the credit bureaus will be notified of your missed payment. If you only pay the "minimum payment" listed on your account by the due date, you will avoid the late fee, but the remaining balance will still start accruing interest. Paying more than the minimum payment will help you pay off the debt faster. Set up auto payIf you're afraid you may forget to manually make your monthly payment, connect your credit card account with a checking account that will automatically pay your bill on the same date every month — just make sure there's enough money in the account to cover it. Don't apply for more credit too soonNew credit inquiries show up on your credit report each time you apply for a new loan or credit card and temporarily bring down your score by a few points. But using the card and paying it off in full and on time will eventually boost your credit score. If you have too many inquiries in a short period of time, lenders may consider that a high risk and deny your application or give you a less-than-ideal interest rate. If you're new to establishing credit, it's best practice to space out your credit applications by at least six months.
Tanza is a CFP® professional and former correspondent for Personal Finance Insider. She broke down personal finance news and wrote about taxes, investing, retirement, wealth building, and debt management. She helmed a biweekly newsletter and a column answering reader questions about money. Tanza is the author of two ebooks, A Guide to Financial Planners and "The One-Month Plan to Master your Money." In 2020, Tanza was the editorial lead on Master Your Money, a yearlong original series providing financial tools, advice, and inspiration to millennials. Tanza joined Business Insider in June 2015 and is an alumna of Elon University, where she studied journalism and Italian. She is based in Los Angeles. Read more Read less What is the fastest way to build credit with a credit card?5 steps to build credit with a credit card. Pay on time, every time (35% of your FICO score) Paying on time is the most important factor in building good credit. ... . Keep your utilization low (30% of your FICO score) ... . Limit new credit applications (15% of your FICO score) ... . Use your card regularly. ... . Increase your credit limit.. Does making payments on a credit card build credit?Credit cards offer one of the best ways for you to build your credit and improve your credit scores by showing how you manage credit on a regular basis. If you want to build good credit, use credit cards regularly while making all your payments on time and using a small portion of your card's credit limit.
How much will my credit score go up if I pay my credit card?If you're already close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt.
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How to pay credit cards to build credit
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