One of the biggest ways that getting a credit card is better for you than getting a debit card or other payment method, is that just getting and keeping a credit card helps establish and raise your credit score. Using it regularly can also boost your credit score. But first, what is a credit score?
Think of your trust, or lack thereof. When someone keeps a promise to you, they earn your trust. When they lie to you or let you down somehow, they lose your trust. You trust some people more than others, because some people have earned more of your trust than others have. You can think of this trust as an emotional or social “score.”
Likewise, there is a level of financial trust that institutions place in you by giving you a job, giving you a loan, extending to you the right to use their property, and so on. In order to properly gauge how trustworthy you are when it comes to financial matters and things that involve money, a score is used. This is your credit score.
Having a higher credit score opens the door for lower interest rates on loans (sometimes no interest), better job opportunities, apartment lease approvals, deposit waivers, and all kinds of benefits related to being trusted to pay your debts and obligations timely and sufficiently.
Your score is made up of a myriad of different factors. Among these factors are things like the number of payments you’ve made on time on existing or historical debts, the average age of your credit accounts (like loans and credit cards), the total number of your credit accounts, and the percentage of your total credit limit used. There are other parts to your score equation, but these are just some examples. You also have more than one version of your score. It’s calculated by giving different factors more weight than others depending on the version of your score and what it’s used for. A mortgage lender finds certain factors more important than what a car dealership might find important.
To enjoy the benefits of a good credit score you must establish a credit history and then nurture and protect it, allowing it to grow. But how do you get a credit score? What helps your credit score?
Having a cell phone bill does not help your credit score. Have a checking account does not help your credit score. Rent-to-own arrangements like Rent-a-Center, if they do not show up on your credit report as a loan or credit line, do not help your credit score. Official loans and credit cards do. They help by showing proof that you can responsibly use money that isn’t yours and pay it back in a timely manner. I once thought that the “pay your bills on time” advice to boosting your credit score applied to all bills. I thought that getting my first cell phone, and the monthly bill that came with it, would build my credit. I also thought the financing arrangement I foolishly got myself into with the local rent-to-own establishment would build my credit. I found out how wrong I was when trying to buy my first car without paying cash and was told that I had no credit history.
The first credit card I ever had, mentioned in the post, had a small credit limit. I rarely used it. For all intents and purposes, it didn’t make any significant difference in my life at that time. But every month I had that card, my score was growing. Just opening a credit line, keeping it open, and never missing a payment will grow your credit score like you wouldn’t believe. Believe it or not, if you don’t have a balance on your credit card, so your amount due is $0, and the billing cycle closes for that month, the credit card company or bank still reports an “on-time payment” for that month, even though you haven’t paid anything. Every month marked as “on-time” on your credit report helps your score.
This is one way that I believe getting a credit card can be beneficial to you. I also believe that using your credit card is better, depending on your specific circumstances, than using cash, checks, or a debit card.
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