Many people think that your credit rating will improve greatly if you were to use your credit card and pay off your balance almost immediately. This is wrong. Credit card companies are looking for people that can take on debt and pay it off over the mid-term. Being able to use your card like a charge card-charge now and quickly discharge all debt at the end of the month, doesn’t fit most banks and credit bureaus’ definition of a good risk.
Sounds weird, right? Well, you have to look at things from the point of view of the banks-they need people who are good credit risks and can pay over extended periods of time. In their view, your ability to pay quickly doesn’t do them any good. Remember, they make their money from interest. When you pay quickly, you don’t accrue interest. They don’t make any money from you if you pay too quickly.
Use the tips below to load up your credit card so you can build up your credit. There is an art to it. Charge too much and you run the risk of overloading yourself with debt. Charge too little and you don’t improve your credit rating.
Charge substantial amounts that you can pay
When using plastic to boost your credit score and credit worthiness, you have to charge a substantial amount. The precise amount, of course, varies from person to person. Different people have different income levels and credit histories. Charge up to a certain percentage of your income and continue to build on it, month after month. Make sure that you can cover not just the interest but a substantial part of the principal as well.
Project three to six months into the future
Don’t go past six months when charging up. Make sure you are able to pay for everything within six months. Remember, you are trying to build credit history. You aren’t trying to bury yourself in debt. The key is to give yourself some headway so you can quickly dig yourself out of this obligation when the time comes. You will know if you have gone overboard if you have a tough time paying your credit card’s monthly minimum.
The plan is to cover the minimum and some of the principal month after month. Don’t settle for just paying the minimum. You are slipping into a trap when you do that.
Always have emergency funds leftover
Finally, you have to make sure you have emergency cash left over. You never know what is around the corner. You might get sick or you or someone important to you might get into an accident. You need to make sure you have the emergency funds available to take care of emergencies. As a rule of thumb, make sure you have six to one year’s worth of income stashed away just in case. You should not factor this into your monthly payments. This amount is separate.