When you are applying for your first credit card, it will benefit you to educate yourself about the rules and protocols that go along with this financial responsibility. One of the most important things to understand is that credit is not another form of cash. By being aware of this, you will be able to stop yourself from getting into debt and raise your credit score in the process. As you build up credit, you will in turn improve your credit score. This simple number is an important component of your finances and goes a long way. A score is important because it will help you get approved for a loan in the future. As a first-time credit user you should understand a few things about a credit score and how it is factored:
Knowing the basics
Your credit score is the numerical expression of the state of your credit. Lenders and other credit card issuers will look at this three-digit number to determine your responsibility in paying back loans. The higher your credit score, the more a financial institution will trust you with a loan. Anything above 720 is considered excellent, while a score below 500 is in serious need of improvement. A FICO credit score is one of the most common evaluators and there are certain components that go into factoring a credit score.
Payment history (35 percent)
Making your monthly minimum payments on time will not only decrease your balances, but it will also show lenders you are a responsible borrower. If you fail to make a payment on time, not only will your credit score be docked a few points, but you will also be charged a late fee. Having an expensive charge added to your balance can make paying back your debt more difficult. If you have trouble remembering to make your monthly payment, try setting up a calendar reminder on your smartphone.
Your balance (30 percent)
Using your card to make purchases can help you build up your credit score, but you don't want this spending to get out of hand. In order to assess how resourcefully you use your balance, lenders will look at your credit utilization rate. This is the percentage of your debt compared to your overall credit limit. For instance, if you have a credit card limit of $5,000 and a balance of $1,500, your utilization rate would be 30 percent. Every bank is different with how they judge this rate, but try to keep it under 30 percent.
How long you have had a card (15 percent)
You may think a good way to curb overspending would be to stop using your card entirely. Taking your card out of your wallet or purse and putting it in a drawer may stop binge spending, but this tactic can actually be counterproductive to fixing credit. Not using one of your credit accounts for extended periods of time can actually knock your score down a few points.
Different types of credit (10 percent)
A credit score also takes into account the different types of credit you use. The score will factor in such accounts as standard credit cards, loans, retail credit cards and mortgages.
New lines of credit (10 percent)
Your mailbox may be full of inquiries from credit card companies about signing up for a new credit card, which you may want to avoid. Opening up several new lines of credit will not only raise your utilization rate, but it will also put a hard inquiry on your credit report, which can lower your credit score.