Hi. I just got my first credit card (through my bank) because I want to build a good credit score. My plan was to buy something under the 30% utilization limit of my maximum and then to immediately pay it off.
Is that too fast? Will that go toward building a good credit score or should I wait awhile and then pay it? If so why? I would much rather just pay it right away.
Secondly, once that is paid off, is there any use -in terms of building my credit score- in buying something else (in the same billing cycle) and paying that off immediately as well?
A credit score is very strongly influenced by your history.
So, buying a single item and then paying it off won’t help much.
What works is: use your card a lot - use it to buy all your everyday items, and then pay it off on time.
Do this for a number of months, and your score will improve.
Also, it’s financially a good strategy to make as many purchases on credit as possible, as long as you pay them off each month. That way, you are using the bank’s money for a month, and getting interest on yours.
I would have two cards: one I would use for as many purchases as I could and pay all the balance on the due date as a good financial strategy (cf beowulff). The other I would make a fairly moderate purchase on and spread the repayments over a few months but with payments well over the minimum; thus incurring some interest charges. This would demonstrate your ability to repay a debt.
It isn’t too fast. But you need to do this every month for a while before it has any benefit on your credit score. So, it’s better to just use the card for all of your purchases and pay it off in full each month. If your regular monthly purchases put you over the 30% mark, then you can make several payments throughout the month to keep the balance down as well. Or, pay off every purchase immediately if that’s what you want to do. But there’s really no benefit to that, and it’s extra work on your part. There’s no harm in waiting until the end of the billing cycle, provided the overall balance isn’t too high. But don’t focus on single purchases. Just get in the habit of using it often, and paying it off each month.
No. As long as it is getting used monthly, it doesn’t matter how many purchases you make each month. The only thing that will show on your credit report is your highest balance, and that is based on the balance at the end of the billing period. If you make a single purchase each month and pay them off immediately, your statement will show that the card was used each month, and that the highest balance was $0. If you make two purchases and pay them off each month, it will show the same thing.
This is based on my experience, anyway. I am not a financial adviser, but I’ve managed to pull off an 850 FICO score a few times.
I have long used two credit cards that I pay off every month. One is for personal expenses and one for household expenses.
Two benefits, I know what I spend for food, gas, insurance etc. separate from fun & toys. I started this in my late twenties along with a small consumer loan & a car loan. Made it easy to qualify for a mortgage when the time came. I now have a great credit rating.
IMHO, consistent long term use of credit is the way to a good credit score.
It’s not perfectly clear what you mean by “immediately”, but just to clear up a possible misunderstanding, it doesn’t matter when you pay off your balance, as long as you do it once a month before the monthly billing cycle ends. Making multiple payments during one billing cycle is not useful.
It can be. If your monthly purchases amount to 90% of your credit limit, then even if you pay off the balance every month, it’s always going to show 90% credit utilization on your credit report. If you make three payments during the month, then your final statement will only show a third of that, and that’s what will be on your credit report. IME.
Pay it off after the end of the monthly cycle (after the monthly bill is issued), but before the due date of the bill.
That is because most credit card issuers only report your balance once a month. Most report your balance on the date the monthly bill is issued. (A few report at the end of the calendar month.) If you pay off your balance before the bill is issued, it will look to other creditors who view your credit report like you are not using your card.
You don’t have to wait until the due date. As a matter of fact, it is a bad idea to wait until the due date in case you forget or something goes wrong. Just pay off the full balance after the bill is issued. There is no benefit in paying less than the full balance or running up interest.
With almost all credit cards, there is a grace period between the end of the monthly cycle (the date the bill is issued) and the due date.
If you pay the full balance shown on your statement during the grace period, there will be no interest and your account will be considered paid on time.
As a new credit card holder, the most important thing to your credit rating is payment history.
So pay the balance in full at the end of every billing period, and before the due date. Or at least, pay the minimum payment by that date. (But paying only the minimum will stretch that out over years, and you’ll end up paying a huge amount of interest. That’s fine for your credit rating, and credit companies will love you – they make tons of money off customers like that. And they make it easy for you to get hooked on pay-the-minimum. For your financial health, try to always pay the full amount every month, so no interest charges. If you overspend one month and can’t, ignore the minimum and pay a big share, like half the amount that month. And pay the rest the next month. Also that next month, take some time to re-evaluate your spending habits.)
Your credit utilization is much less important to a new credit card user than payment history. Even if you go over the guideline of 30% utilization, it doesn’t matter if you pay every month. In fact, after a few months, the credit card company may notice this and call you, offering to increase your credit limit, since you’re such a reliable payer. That’s fine; increasing the limit will automatically reduce your credit utilization percentage (as long as you don’t go crazy and spend more). Or you can call the company yourself and ask for a credit limit increase, pointing to your regular payments.
And since credit utilization is figured as the total credit used vs. total credit available (from all sources), another way of reducing it is by getting another credit card from a different company. Even if you keep that card for emergencies and don’t use it, the available credit limit will reduce your credit utilization score. Plus getting a second card should be easier, since you already have one, and have been paying it every month. The risk, of course, it that you might lose self-control and start overspending.
If you can put an amount in the bank you don’t need for a while, say $1000 or more, open a new account with it. Then apply for a personal loan at the same bank using that account as collateral. They may freeze the account until you pay the loan off. Pay the loan off with the actual money from the loan. Pay on time and pay a bit ahead.
Do this a couple of times over the course of a year or 2 with a couple different banks. It will cost you a few dollars in interest, but you will have a solid credit rating of making payments on time and getting approved for loans.
This trick works. I did it years ago, as did All 3 of my kids when they turned 18 and by the time they were 21 they all had strong credit ratings and their own credit cards with a fairly high limit for their age.
Do you know what else demonstrates your ability to repay a debt? Paying the debt. No need to incur interest fees on a credit card to build credit.
Now, I believe that the type of debt (revolving debt like a credit card vs installment debt like a car loan or mortgage) you have plays a part in your credit rating, but paying a revolving account as if it were installment debt won’t help, it will still be considered a revolving account. So why pay interest if you don’t need to?
Agreed. No one other than the bank who issued the credit card will know that you are paying off a credit card over time. That is not shown on your credit report. Other creditors cannot tell the difference between paying off a debt over time or paying in full every month and making new charges every month.
My CCs are linked to my current account and they automatically take the full payment each month. This ensures that I do not miss a payment as even one day over makes the interest on the full amount payable. It’s actually cheaper to go overdrawn for a few days (provided that you have a facility arranged) than to pay CC interest charges.
Like others have suggested, once you’ve had your card for a while (say, half a year), it’s a good idea to apply for a second card from a different institution. (Provided you have been regularly paying off the first one in full ! If you’re having trouble doing that, don’t get a second card!)
The reason for this is in case you’re the victim of an identity theft or scammer. Your first card might get frozen while you try to straighten it out with the issuer. Having a second card in reserve from a different institution will minimise the disruption.
As well, you can use them for different things, as other posters have noticed. Me, I use my
Primary card for in-person purchases, and my secondary card for on-line purchases. That way, if you’re scammed, it helps the fraud department of the card issuer to figure out where the scamming occurred. For example, we suddenly saw a huge number of online charges on our internet card and were able to point our bank directly to where the breach occurred. (Thanks, PayPal! ) Also meant that our primary card with a different bank was not affected while the bank for our internet card was working with PayPal to figure it out and eventually unfreeze our internet card.
Sorry, how do I know when “the bill is issued”? I don’t get paper bills from my bank, it is all online. I had to call them to ask when the monthly cycle ends. She said Aug 8th and the due date is Sept 3rd if I bought something today. So, assuming I bought something today, when should I pay it in full?
Is this “issued bill” different than it just showing up as a charge on the cc’s online account?
My bank issues an on-line credit card statement electronically each month. It gives all the current purchases, the amount owing, the statement date, the payment date, and the minimum payment.
If they don’t issue a paper bill, they should make a pdf version of the bill available for you to access the day after the monthly cycle ends. It should contain a summary of your transactions for the month, state the minimum payment due, and the due date.
Yes, it is different than what you see on the online account. The online account shows you a daily report of your activity. Then after the end of the statement cycle, they issue a summary of the entire month’s activity and either mail it to you or make it available for download from their web site.