You Need Credit to Build Credit

An important step in building a good credit rating is by using a credit card wisely. For anyone trying to re-build their credit or for young individuals just starting out, pay close attention when shopping for credit cards. When you're trying to build a positive credit history for yourself, using the right credit card is important. Making small purchases and then making your payments on time each month is an easy, reliable way to build a good credit history.

What to Look For On a Credit Card Application

If you receive a credit card application that appears to offer a low monthly interest rate, don't make a decision until you examine the Disclosure Box. That is where you'll find a more important measure of credit terms - the Annual Percentage Rate, or APR. By federal law, the Disclosures will also tell you whether or not the card has what is called a grace period - a number of days, usually 25, before your purchase starts to accrue finance charges.

If a card has a reasonable grace period and you pay off your balance in full at the end of each billing cycle, you won't have to pay a finance charge. It isn't difficult to find credit cards that offer grace periods, so if the Disclosure doesn't declare one then look for a better offer.

If you don't have any credit history, a credit card issuer won't give you a very high credit limit, but that's probably best when you're just starting out. You won't be tempted to go into serious debt with your very first credit card!

Calculate Your Monthly Finance Charges

Ideally you will want to pay off your balance each month to avoid paying any finance charges; however, when that isn't possible it's important to know the actual cost of the items you purchase. The annual percentage rate, divided by 12 months, gives you the periodic rate that will be applied to your outstanding balance each month. Estimate what your monthly finance charge will be by multiplying the periodic rate times your outstanding balance. It may sound complicated initially, but taking the time to learn this simple equation can make a big difference in how you use your credit card.

By being able to see how much you actually spend on an item that you don't pay off at the end of the month, it might help you to resist the temptation to over-use your card on non-essential purchases. Something that you want to buy might be on sale at the time you purchase it, but if you don't pay off your balance at the end of the month then finance charges can dramatically increase the actual cost of the item.

Use Your Credit Card as a Tool

Credit cards are just one of the tools available to help you build a positive credit history. Making on-time payments for other bills, such as rent and utilities, are also important. Depending on your situation, within 1-2 years your credit rating will be improved enough that you no longer need to use your card for new purchases to maintain your good credit.

Use these tools wisely, and they'll help build your financial future!