Strategies to Grow Your Credit Score – Choosing a Credit Card

Choosing the right credit card with the right features can be an effective tool to increase your score.  It is important to understand how to compare their varying offers.

Weigh out the factors you need when choosing a credit card:

  1. Secured or Unsecured
  2. Fees
  3. Interest
  4. Credit Limit
  5. Rewards

Secured or Unsecured

A typical credit card is unsecured.  You are offered a line of credit based on your credit score.  If your credit score does not quality for an unsecured card then a secured card can offer you a way to earn credit.  A secured card simply means that you are required to make a cash deposit before you are allowed to make purchases. The amount of your purchases are then limited to the amount of your deposit.  When you make a payment you are replenishing your deposit.

Fees

You can expect an annual fee on some secured credit cards, premium credit cards, and credit cards designed for people with low credit scores.  The amount can vary from as little as $20 to as high as $500. If you have poor credit you may have to pay the fee until your score improves and you can qualify for something better.

Interest

The interest rate (APR - Annual Percentage Rate) you qualify for will depend on your credit score, however, different cards will have different rates for the same score.  Credit cards that offer rewards will tend to have higher interest rates. If you don’t think that your budget will allow you to pay off your balance every month it is wise to choose the card that will grant you the lowest interest rate.

Credit Limit

The credit limit is the maximum balance you are allowed to have on your card at any given time.  The amount of credit you use impacts your credit score.  To grow your credit it is wise to keep your balance to 30% of your credit limit.  For example, if you have a credit limit of $500, keeping your balance at no more than $150 ($500 x30% = $150) will keep you in a credit utilization factor favorable to building a credit score.   

Rewards

Creditors may offer reward programs that include travel miles, discounts for special events or attractions, or cash back on your purchases.  All of these things can sound attractive but it is important to read the small print to determine if the rewards are worth it. Generally speaking, if you are not paying off your entire balance every month, the interest you are paying to carry a balance is costing you more than you are earning in rewards.  

Finally, effective credit card management is essential.  You are better off have 1 or 2 credit cards through a major credit card company.  It will be easier to monitor your spending, keep your balances low, and build a history of on-time payments.  Checking your credit score often does not negatively impact your credit score and will keep you familiarized with your financial standing.