9 • Do Credit Cards
Really Build Credit Score?
No! This is a myth. Credit cards are a control mechanism with more ways to lose score than gain score. Credit cards are lender’s profit center and so common, that if they were set to really “build credit”, everyone would have a great credit and this would lower lender’s profits. So on perfect credit card use you are lucky to get only 2-3 points a month, when its easier to lose 10 to 12 points.
Some examples of how credit rating is affected by credit card use:
- If you pay a credit card once a month, every month, you barely get points,
- If you pay only the agreed minimum payments, you get no points,
- If you pay your credit card down to zero balance each month, you get no points,
- If you use more than 30% to 50% of the credit limit, you lose points,
- If you use more than 60% of the credit limit, you are a risk at high point penalty.
When you have multiple authorized credit lines you are recognized as an accepted credit user. If you keep credit cards in good standing you are merely not losing credit score so you are seen as a credit user with good paying habits. Paying back your other loans will build score very well so the objective is to maximize credit handling of various accounts to show both ability to repay and good paying habit. Having both cards and loans will build an exemplary credit report that brings you financial esteem and lower interest opportunities when you need a loan or mortgage. A credit score of 750 or above may unlock big opportunities in career, business, and significantly lower interest rates on necessary new loans and mortgages — this is nothing to sneeze at. If you don't trust yourself, just lock your credit card in a drawer.
Using a credit card as a loan is another matter because there are so many ways to lose credit score that it becomes a slippery slope to slide down into debt. Even if you rarely use the credit card, it's important to have one because a big part of your credit report is how many different types of credit accounts that you have in good standing. Credit Bureau computers monitor timely usage. Credit cards should be used lightly each month as a purchase convenience and paid on time. It’s important to always carry a small $30 to $50 balance so the system will recognize activity on the card and the lender made some interest. It will record good credit status but it doesn’t notice how little money was made. The average Canadian carrying only a small monthly balance owes $1,269 to credit card companies. At 18 per cent interest, that cost is about $230 a year that you could save if you paid your balance down to $30-$40 each month.
• Golden Rule: Never use a regular credit card with the idea of building your credit. It will not happen! This is always merely a path to dig a deeper debt hole that will just saddle you with monthly rental costs of using other peoples money.
When you Understand Credit, You will have Great Credit!