Credit cards are a helpful tool to build credit. But many people are afraid to use them because of the high interest rates they come with.
The average credit card interest rate is over 20%, so that's not an unfounded fear. If you are not 100% sure you'll be able to pay off your card in full every month before you owe interest, then steering clear of charging could be the right call.
The good news is, you don't have to put your personal finances at risk with high credit card interest charges just to use cards to improve your credit score. There's a very simple way you could get the credit-building benefits a card provides without taking on the risk of overspending.
This technique could help you build credit without risk
The big danger of credit cards is that you'll let your spending get out of control and find yourself with a balance you can't pay back at the end of the month. But, this can be avoided if you get a card, set up a single recurring transaction on it, and then arrange to have that amount auto-paid each month.
For example, let's say you have a $15.49 per month Netflix account. Arrange to have this charged to your credit card and set up an automatic payment for that amount the very next day after the Netflix charge is put on the card. Then, put the card away where you won't be tempted to use it -- or even cut it up if you really can't trust yourself.
With this approach, you won't be at risk of ending up in credit card debt trouble because you won't be using your card to charge everyday purchases or to pay for things like vacations or other splurges. The sole purpose of the card will be to help you increase your credit score.
How this approach can help you build credit
It may seem silly to go to all this effort just to get a credit card for one recurring payment. But, the reality is, credit cards are a great tool to help you improve your credit score. See, your credit score is determined by the following factors:
- Your payment history
- Your credit utilization ratio (credit used versus how much credit is available)
- The average age of your credit history
- The mix of different kinds of credit you have
- The number of new inquiries on your credit report (inquiries are put on your report each time you apply for new credit)
If you put a single recurring payment on your card and you pay it off in full each month, you'll develop a positive payment history. You'll keep your credit utilization ratio very low since you'll only have one small charge. Your credit card will count as one of your different credit types, and you can keep the card open for a long time to help you get a longer credit history. And you can do all this virtually without risk if you just get the card, set up the system, and then put it out of reach.
It is understandable to be afraid of credit card debt -- although, ideally, you can work to overcome this fear by living on a budget and getting your spending under control so you can reap other benefits, like earning credit card rewards.
But if you really just don't like debt or don't trust yourself, this doesn't mean you have to give up the chance to build credit. When you go to get a mortgage, car loan, or other debt you absolutely have to take on, the credit history that this approach helps you develop will really come in handy.
