Unlike in more profligate times it is no longer easy to obtain a credit card without an established credit history, resulting in a catch 22 situation. One of the best ways to establish a good credit reputation is to use a credit card responsibly, yet those with no credit history are more likely to be denied a credit card.
At one time student credit cards were foisted on youngsters, but changes in the credit card laws precludes even this time established method of obtaining a first credit card. Free pens and t shirts are no longer used to bribe youngsters to sign up for credit. Today’s students require proof of income or a responsible co-signer before a credit card will be issued.
Of course it isn’t just youngsters who need to establish a credit reputation. Approximately one quarter of all Americans have no access to credit. Many seek credit cards in order to establish a credit reputation that will help them to obtain mortgages and loans in the future.
Before obtaining a credit card it is good practice to know how to use them in the best way to establish credit, rather than fall into bad habits which may have a detrimental impact on credit ratings. Rather than being viewed as a convenient tool to spend beyond ones means, credit cards should be primarily considered as the simplest way of establishing credit. Ideal credit card use means never carrying a balance that becomes liable to interest charges and always paying the credit card bill before the due date.
Astute card holders establish credit through their cards by making a regular monthly purchase that is paid off in full before the due date. They never succumb to borrowing cash through cash advances charged at premium interest rates. It is just as important to ensure that not all available credit is utilized. Even though a credit limit may be $1000, cardholders should utilize no more than 30 percent, or preferably less.
Card holders who spend close to their credit limit will be viewed negatively by the credit scoring models even if the full amount is repaid the same month. Thus knowing ones credit limit and never exceeding 30 percent of it is of immense importance.
Although credit card issuers are completely satisfied if consumers make only minimum payments, it is a bad practice to follow. Interest is charged on outstanding balances, which in turn means that purchases made on credit end up costing far more than the original price. Those who make only minimum payments are often spending beyond their means and can easily fall into debt.
Late or missed payments can easily result which not only incur fines but leave card holders exposed to penalty interest rates. It is important to be aware that late and missed payments can remain on ones credit record for seven years. Payments can be late or missed not only through lack of funds but due to disorganization. The best practice is to establish a monthly automated payment to cover the credit card balance.
It may well be the case that those new to credit cards may only be able to obtain a card from their own bank that knows their financial history, or a secured card. The latter should not be perceived as a negative as can provide an easy stepping stone to unsecured credit cards whilst instilling good credit card practices in the first time credit user.
Responsible use of credit cards can help to establish a good credit score which in turn will lead to preferential interest rates, job opportunities and reduced insurance costs. Taking the time to use credit cards well will pay off in the long term and ensure a good financial reputation.