People often wonder if credit cards are really helpful to their credit it all. Cards can be stolen, and you can even get yourself into trouble by overspending with them, but honestly they are a great way to build, or establish credit.
Your credit file, and your score for that matter, is built of your late payments, installment loans, medical bills, and revolving credit.
Revolving credit is the type of credit that is used by a credit card. Its called revolving because you use it, pay back what you used and then use it again. It is an endless cycle, unlike installment credit where you take out a loan of $5,000 and pay back the $5,000 with a set payment for a set amount of time.
Your credit will always get a boost from having revolving credit in addition to installment credit. Many times its easier to get your foot in the door for installment credit if you have some revolving credit to show that you have the ability to pay back borrowed money.
The things to watch out for with revolving credit is your credit utilization.
A simple break down of credit utilization is like this:
If you have a credit card with a $500 limit, and each month you spend $100 on your credit card, you will have a 20% credit utilization, which isn't terrible. Now with that same card if each month you spend $250, or even $500 then you will show that you have 50% or 100% credit utilization (respectively).
You want to keep your credit utilization as low as possible. Once it hits the 50% mark it really starts to negatively impact your credit score. Each percentage above 50% impacts it a little more. You have two ways to deal with this.
Keep your Monthly Balance Low or paid off completely
Ask for a credit limit increase
Now the second will help to improve your score, as they will decrease your credit utilization, however, a higher credit limit, means more than you can spend on credit. So if you choose to increase your credit line, make sure it doesn't turn into just spending more because there is more to spend.
So our thoughts, is yes, you do need a credit card to help your credit, but just be careful with them and don't go spending crazy. Many cards offer points for purchases, and most have fraud protection in the unfortunate event your card is lost or stolen, which are all features to help protect you, and your credit.
