It Takes Credit to Make Credit

Using a credit card wisely is an important step in building a good credit
rating. If you're trying to re-build your credit or if you're young and
just starting out, pay close attention the next time you receive a new card
offer in the mail. When you're trying to build a positive credit history
for yourself, using the right credit card makes sense. Making small
purchases and then making your payments on time each month is a simple,
reliable way to build an outstanding credit report.



What to Look For On a Credit Card Application

If you receive a credit card application that appears to offer a low monthly
interest rate, don't make a decision until you turn it over and closely
examine the Disclosure Box. In it you'll find a more important measure
of credit terms - the Annual Percentage Rate, or APR. By federal law,
the Disclosure Box will also tell you whether or not the card has what is
called a grace period - a number of days, usually 25, until your purchase
starts to accrue finance charges. If a card has a reasonable grace period
and you pay off your balance at the end of each billing cycle, you won't
have to pay finance charges. It isn't difficult to find credit cards that offer
these grace periods, so if the Disclosure Box doesn't declare one then throw
the application in the trash and look for a better offer.


If you don't have any credit history at all, a credit card company
won't want to give you a very high credit limit, but that's probably best
when you're just starting out. You don't want to be tempted to go into
serious debt with your very first credit card.



Calculate Your Monthly Finance Charges

Ideally you want to pay off your balance each month to avoid paying any finance
charges, but when that isn't possible it's important to know the actual cost of the
items you purchase. The annual percentage rate, divided by 12 months, gives
you the periodic rate that will be applied to your outstanding balance each month.
You can estimate what your monthly finance charge will be by multiplying the
periodic rate times the outstanding balance. It may sound complicated at first, but
taking the time to learn this simple equation can make a big difference in how you
use your credit card.


When you're able to see how much you actually spend on an item that
you don't pay off at the end of the month, it might help you to resist the
temptation to over-use your card. An item that you want to buy might be on
sale at the time you purchase it, but if you don't pay off your balance at
the end of the month then those finance charges can dramatically increase
the actual amount you'll end up paying.


Use Your Credit
Card as a Tool

Credit cards are only one of the tools available to help you build a positive
credit history. Making on-time payments for other forms of credit, such as rent
and utilities, are also important. Depending on your situation, within 1-2 years
your credit rating will be improved enough that you no longer need to use your
card for new purchases to maintain your good credit. Use these tools wisely, and
they'll help build your financial future!