One of the common pieces of advice given to those who want to build their credit history is to get a credit card. This is because credit cards are well-known for being a fast way to build a credit history.
But why are credit cards so influential when it comes to your credit history? There are a number of reasons that credit cards are such a big part of your credit score:
Payment History is Reported Regularly
One of the biggest reasons that credit cards are so influential is due to the fact that your payment history is reported regularly. Many credit card issuers report your payment each month. So your payment, whether it’s on time or not, is recorded every billing period and the record stretches back three to five years. That’s a lot of data. Paying on time regularly can help you establish a habit that looks positive within a few months. Your payment history accounts for approximately 35% of your FICO score.
Credit Utilization is Easy to See
It’s especially easy to measure your credit utilization when it comes to credit cards. Most issuers report your current balance each month, as well as your current limit. It’s a simple matter to see how much of your credit limit you are using each month. It’s also easy to see habits of spending — whether or not you routinely get close to the limit each month. Be careful to pay attention to your credit utilization because it accounts for about 30% of your credit score.
You Can Establish the Length of Your Credit History
Credit cards are also helpful in helping establish how long you have had credit. Part of this measure is how long you have had your longest account. Because credit cards are relatively easy to get (as compared to other types of loans), establishing a credit account is fairly simple with a credit card.
However, your credit score also includes the average age of your credit accounts. So you do need to be careful. If you open several credit cards within a couple of years, it really reduces the average age of your credit accounts. Too many credit cards, opened only a short time ago, can quickly drag down your score by a few points.
Be Smart about Your Credit Cards
Your credit cards can be helpful financial tools. However, you do need to be smart about how you use them. Carefully consider which credit card accounts you open, and how you use them. Don’t charge more than you can pay off easily. Indeed, it’s often a good idea to keep your balance to around 30% or less of your available credit. Make your payments on time, and pay at least the full minimum amount (it’s better to pay more than the minimum, though).
When you are smart about your credit card use, you can build a good credit history fairly quickly. On the flip side, though, poor credit card habits will result in a bad credit score that can be a little harder to recover from.