If you are trying to rebuild your credit, you may think that your best option is to get rid of all your credit cards, or to avoid buying items on credit in the future. However, nothing could be further from the truth; in fact, if you don’t have any credit cards at all, you might find that it takes longer to repair your credit. Even if you’re getting out of debt and paying other bills on time, without a credit card, rebuilding a positive credit history can be difficult at best.
Your credit score is not determined by any one type of credit. Loans, credit cards, and other financial obligations all play a role. In general, credit cards are an important aspect in boosting credit scores because credit cards are an ongoing gauge of how well you pay back your debts, how you manage debt, and how responsible you are when it comes to spending. If you can maintain low balances, pay your credit card bills on time each month, and maintain a solid history of repayment, your credit scores will rise.
Getting rid of credit cards in an attempt to boost your credit scores will backfire. A better option is to choose one or two cards with a decent interest rate, and keep those accounts open and current. You don’t need to charge much – it’s actually better if you keep your purchases anywhere from 10% – 30% of your overall credit card limit. This demonstrates to creditors that you can be responsible with the credit you are given. It also makes it easier for you to pay off the credit card in full each month, which is another way to rebuild your credit scores.
If you have several credit cards, you may wonder which cards are best to keep, and which accounts (if any) you should close. In general, keep your credit card account open if:
You’ve had the card for several years. Having a long credit history is more beneficial than having a short one.
You have a balance on the card. Canceling an account while you still have a balance can wreck havoc on your available-credit-to-debt ratio.
The interest rates are low. Lower interest rate cards can not only save you money, but they can make it easier for you to stick to your repayment goals as well.
When should you cancel a credit card? In general, if the interest rate is high, or if the credit card company uses double-billing, it’s probably a good idea to get rid of that card as soon as the balance is paid off. The only exception to this is if the credit card is one with a long credit history. You don’t want to cancel your oldest cards, so in this instance, your best option would be to charge a very small amount on the card each month, and then pay it off again as soon as possible to avoid the extra interest hit.
If you are trying to rebuild your credit, you don’t currently have a credit card, and don’t think you can qualify to get one, try a secured credit card instead. With a secured card, you put down a deposit for a specified amount (usually anywhere from $200-$500) and in exchange you receive a credit card with a limit equal to the deposit. Charge only a small amount on the card, and then pay it off each month – this will let you build your credit, even if you don’t initially qualify for a regular credit card.
Regardless of which route you choose, getting and maintaining a credit card account is an essential part of any credit repair plan. Don’t assume that all credit is “bad” credit. If you want to be successful in increasing your credit scores, you’ll definitely need a credit card – just be sure to pick one that’s easy to manage, and don’t let the balances get out of hand.