Most of us have encountered various warnings on how imprudent use of credit cards can lead to financial ruin. What may come as news to many of us is the fact that credit cards can also be used to improve financial well-being. Thus, just as there is always the possibility of financial ruin due to imprudent use of credit cards, so is there also a possibility of financial improvement through the prudent use of credit cards. In this article, we will be describing the exact mechanism through which you can improve your financial situation using credit cards. We will also look at the specific practical steps you need to take, if you wish to improve your financial situation using credit cards.
The exact mechanism
As it turns out, the mechanism through which you can improve your financial situation using credit cards is actually quite simple. You see, when you use your credit card responsibly, your credit score goes up. For instance, if you are consistent in using your credit card to pay for stuff and then repaying the credit card bill in a timely manner, it leads to a better credit score. Consequently, the higher credit score earned that way translates into an improved financial situation in several ways.
With a higher credit score (attained through the prudent use of credit cards), you will be in a position to access credit facilities that were previously out of reach for you. In other words, you will find that with a higher credit score, you are able to borrow bigger sums of money. Thus, for instance, you could find the higher credit score making it possible to borrow enough funds to set up a business with. That can subsequently be the turning point in your finances – because once you have a business up and running, it can translate into a vast increase in your income.
Or it could be a situation where the higher credit score (attained through prudent use of credit cards) leads into access to mortgage facilities. Once you are able to access a mortgage, you may be in a position to buy your own house, and thus stop paying rent. This too would translate into vast improvement in your financial position in the long run.
There is also the scenario where the higher credit score (attained through prudent use of credit cards) could lead into a situation where you are able to borrow at lower interest rates. This would, in the long run, translate into a better financial position – as you would get to save the vast sums of money you’d otherwise have spent on higher interest payments.
A higher credit score could even translate into a better job for you. We know that some employers have developed a tendency to look at job applicants’ credit scores as part of background checks. Thus, with a better credit score (attained due to prudent use of credit cards) you could find jobs that were previously out of reach for you now becoming available…
If you are seeking to improve your finances using credit cards, there are 6 specific steps you need to take:
- Identify appropriate credit card(s): An appropriate credit card is one that you can afford comfortably. There also exists credit cards that are specifically meant for individuals who are seeking to improve their credit scores – the so called ‘credit cards for poor credit’. The most important thing is for you to undertake some due diligence, to identify the most appropriate credit card(s) for your situation.
- Apply for the identified credit card(s): The most important thing here is to ensure that you don’t apply for too many credit cards. Remember, when you apply for a credit card, your credit report is subjected to a ‘hard inquiry’. And each ‘hard inquiry’ shaves a few points off your credit score. So, in an attempt to improve your credit score, you could actually end up hurting it by making too many credit card applications. In any event, if you apply for too many credit cards, you could end up having a difficult time keeping up with the various payment due dates. That could then lead to late payments and decline in the very credit score you were trying to improve… Thus, one or two credit cards (three at most) should suffice, in most cases.
- Ensure that you always pay the credit card bills on time: This is the most important thing, if you are trying to improve your credit score – and by extension your entire financial situation — using credit cards. So it is very important for you to know when the various credit card bills are due, and ensure that you pay them well before the due dates. Remember that for the most part, it is this demonstrated ability to pay off your credit card bills on time that will, over time, translate into better credit score. So give it the seriousness it deserves and prioritize it.
- Ensure that you don’t exhaust the credit limit(s): It has been postulated that if you consistently exhaust your credit limit, it is taken to mean that you are not fully responsible financially. You are viewed as the sort of individual who makes use of credit facilities just because they are available. So you can opt for a situation where you consistently make use of 30% to 40% of the available credit, in order to have an impact on the credit score. If you only use 10% or 20% of the available credit, it may not have an impact on your credit score, even if you pay the bills in the most timely manner. So use a big enough chunk of the available credit (to have an impact on your credit score), but don’t get near to exhausting it.
- Watch as your credit score improves: The most important thing here is for you to be patient. For instance, the first timely credit card payment may not have an impact on your credit score. What the credit bureaus are looking for is consistency. If you are consistent in using your credit cards and paying off the credit card bills on time, you will eventually start seeing results in terms of improved credit score, by and by.
- Take full advantage of the improved credit score: The moment your credit score improves to an appreciable point, take full advantage of it. For instance, you may now apply for jobs that were out of your reach when your credit score was lower. Then use the earnings to improve your overall financial situation. Or you may apply for business loans that were out reach when your credit score was lower. Then use the business income to improve your overall financial situation. Or at yet another level, you may apply for mortgages that were out of reach when your credit score was lower. Then use the rent savings to improve your overall financial situation… In a nutshell, take full advantage of the hard-earned higher credit score to improve your overall financial situation.