Firstly, I will be using the Fico score method of calculating credit scores; which is what most lenders will use to calculate your credit score. Also, anyone looking to get a credit card should do more research and compare multiple credit cards from different banks to get the best outcome for your personalized credit card needs.
Credit cards can save you money! But how? I’m glad you asked. Lenders run your credit score to determine how good you are at paying back money and what interest rate they will give you for loans. The higher the credit score you have, the lower the interest rate they will give you for loans, and the more money you save. You can also get money back on your purchase and get rewards like air miles and cashback from your card!
There are 5 factors that affect your credit score: payment history, amounts owed, length of credit history, new credit, and credit mix. I will, however, only talk about the factors that will affect the beginner with no loans.
There are three things that contribute to credit length- how long your credit accounts have been open, how long specific credit accounts have been open; and, how long it has been since the account has been used. By having a credit card now sooner than later you can start building the length of your credit, which makes up 15% of your credit. So if you put all your purchases on your card and pay them off immediately and the longer you have your credit card the better your credit score can be.
Secondly, amounts owed is simply the amount of credit debt you have and the utilization ratio and makes up 30% of your credit score. In a nutshell, if you pay your card back on time and use a very small amount of your credit limit then your score will rise. Pro tip: the higher your limit the easier it will be to spend a smaller percent.
Payment history makes up 35%, the most of your credit score but is pretty simple. If you pay all your credit card payments off before they are late and make a purchase on the card at ever 3 months to keep your card active, you will be set.
New credit makes up 10% of your credit score whenever you get a new credit card it will remain on the report for 12 months. So don’t open new cards too rapidly but don’t let this stop you from opening new cards- it only affects your score for 12 months.
Credit mix affects 10% of your credit score but if you have no loans you don’t need to worry about it.
To conclude, get your card as soon as possible, put all your purchases on it and pay them off immediately, don’t close any cards unless your fees outways the rewards you’re getting or you not able to use the card at least once every 3 months, use the smallest amount of your credit limit as possible, and don’t open cards too rapidly.
So what are you waiting for, go to the bank and start saving money for your future self!