No matter what you’ve read about household credit card debt and American money woes, remember that most people struggling with debt didn’t land there by choice. Sometimes all it takes is a few massive medical bills, a pricey divorce, or a cut in pay to send your finances into a tailspin. When that happens, it’s easy to turn to credit to bridge the gap — at least until your credit card bills take on a life of their own.
The reality is, having a credit card for emergencies is actually a good idea. You never know what kind of surprises life will throw your way, whether it’s a leaking roof that needs to be replaced, an emergency surgery, or a tax bill you weren’t prepared to pay.
But, what happens when you don’t have the money to pay your credit card off at the end of the month? In short, your debt can go from manageable to scary really fast — much faster than you think. And on top of accumulating debt, you’ll typically have to pay interest — up to 24.99% APR or more on some cards. Heck, even the average credit card APR is well over 17% right now — and that’s the average.
And the pain doesn’t stop there. If you’re only able to make minimum payments, it can take years and years to pay off your debt — and you wind up paying more the longer it takes. If you happen to miss a payment or make a payment past your due date, you’ll take a massive hit to your credit score and rack up a late payment fee.
Why your credit score matters
I’m not saying credit is all doom and gloom — not at all. I’m simply sharing the many pitfalls you’ll need to avoid if you choose to use credit cards. There are actually quite a few ways you can “win” the credit game without getting into debt or ruining your credit score, too, so don’t be discouraged.
Believe me, your credit score matters more than you think. If you’ve ever tried to take out a mortgage, borrow money for a car, or rent an apartment, then you already know.
Like it or not, lenders, landlords, and businesses use your credit score and the information on your credit report to determine whether to work with you. If you have “poor” credit or even “fair” credit, you may not qualify for the home loan, a car loan, or apartment you want. If you ruin your credit and don’t take steps to improve it, you could be renting a crappy apartment or living in your parent’s basement until the end of time. Who wants that?
This guide goes over what a credit score is, how to check it for free, and how to raise your credit score quickly. We’ll also go over how credit cards work, how to get one, and how to use a credit card to build credit over time.
Some of the topics we’ll cover are boring, but they’re important to understand if you don’t want your life choices severely limited by poor credit. Keep reading and we promise you’ll learn something you didn’t know before.
What is a credit score?
Lenders use a few different types of credit scores to measure your creditworthiness, including VantageScore credit scores and the FICO score model. The reality, however, is that 90% of top lenders rely on the FICO score over other types of scores.
What is a FICO score exactly? Your FICO score is a three-digit number between 300 and 850 that represents your credit health. The higher your credit score is, the better off you are.
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Generally speaking, FICO breaks down their scores into the following categories:
- Exceptional credit is any score over 800. Scores in this range are higher than the national average, and consumers with excellent credit are very likely to be approved for loans and other types of credit.
- Very good credit is any score between 740 and 799. Consumers with scores in this range are very likely to get approved for the loans they want with competitive interest rates.
- Good credit is any score between 670 and 739. Borrowers in this range are typically considered “acceptable,” and they may or not may get approval for loans with the best rates and terms. (Read: 3 tips to get approved for a better interest rate on a loan)
- Fair credit includes scores between 580 and 669. If your credit score falls in this range, you may be denied for credit cards and loans. If you do get approved, you will likely pay higher fees and a higher interest rate.
- Poor credit is any FICO score that is 579 or lower. People in this range are usually denied when they apply for unsecured credit cards or loans.
The details above probably have you wondering something — what is the average credit score anyway? According to credit reporting agency Experian, the average credit score was 704 last year. This means most Americans have “good credit,” although there are plenty of folks who fall on both extreme ends of the spectrum.
Another important thing to remember — there are three main credit reporting agencies that dole out credit scores. Credit bureaus include Experian, Equifax, and TransUnion, and each one of them may assign you a different credit score than the next. This means you have three FICO credit scores from the three credit reporting agencies, even using the same credit scoring method.
How to check your credit score
If your goal is improving your credit, it’s crucial to find out “where you’re at.” This means running a credit score check through a credit score estimator or signing up for a service that lets you get your credit score free.
Do you need a free Equifax credit score? A free TransUnion credit score? A free Experian credit score? Probably not all three. The point is getting some sort of estimate of your credit score so you know where you stand and if you need to take steps to improve.
Ready to face your credit score? Here’s what we suggest:
- Sign up with Credit Sesame for a free estimate of your credit score. These free services will provide you with updates on your credit score in real time, making it easy to monitor your progress.
- Check your credit report online for free with AnnualCreditReport.com. This government-approved website lets you get a copy of your credit report from all three credit bureaus — Experian, Equifax, and TransUnion — once per year.
- Check whether any of your credit cards offer a free credit score on your monthly statement. Many popular cards and card issuers do, including Discover credit cards. Capital One credit cards also come with CreditWise — a free service that lets you track your credit in real time for free.
5 tips to raise your credit score in a hurry
You may be wondering how to raise your score by 200 points over time or how to get your credit score up fast. Either way, the steps to improve your credit score are the same:
Credit score tip 1: Make all your monthly payments on time — all of them!
The most important factor that makes up your FICO score is your payment history. As a result, you need to make it a priority to make all your monthly bills on time. This include credit cards, utility bills, your car loan, and any other bills you have.
Credit score tip 2: Pay down high-interest consumer debt.
The second most important factor that makes up your credit score is how much money you owe in relation to your credit limits. Experian notes that high credit utilization tips lenders off that you could be a high-risk borrower. Keep your credit utilization below 30% at all times, and you should see your score rise over the long haul.
Credit score tip 3: Don’t open too many new accounts.
While it can be tempting to open new credit cards accounts to earn airline miles or cash back, try not to open too many. Each new card places a hard inquiry on your credit report, and each hard inquiry can hurt your score. Opening a lot of new accounts can also reduce the average length of your credit history, which can also negatively impact your credit health.
Credit score tip 4: Keep old credit accounts open — even if you’re not using them.
Also make sure you’re not closing older credit cards that aren’t in use. Each card you keep open can make your credit history seem longer, and this can help increase your score over time.
Credit score tip 5: Dispute inconsistencies and errors on your credit report.
When you get a free copy of your reports from AnnualCreditReport.com, make sure to scan them to check for incorrect information that could be hurting your score. If you find errors or downright lies, make sure to dispute them via the formal process offered by the Federal Trade Commission (FTC).
How do credit cards work?
We already mentioned how credit cards can be a valuable tool in a pinch, but you really do need to know how they work before you dive in. Having an understanding of how interest is charged can help you avoid racking up big balances that will devour your extra income. Plus, you need to know how to use a credit card in your favor — in a way that will help you instead of ruining your life.
First, it’s important to understand that credit cards offer a line of credit you can borrow against. Also be aware that credit cards have limits! Your credit limit will be based on your income, your credit score, and other factors.
When you use a credit card to make a purchase or take out a cash advance, you’re required to make a minimum payment toward your balance every month. This minimum payment can vary depending on the card issuer, but it is usually somewhere in the ballpark of 2% to 3% of your credit card balance.
If you pay the full balance on your credit card statement within your grace period, you are not charged interest on that balance. If you don’t pay your balance in full, on the other hand, interest begins accruing on your balance the day after your credit card due date.
Credit cards charge interest on your purchases, balance transfers, and cash advances in the form of an APR — or annual percentage rate. But, don’t let the word “annual” fool you. Credit cards actually charge interest on your balance on a daily basis!
To find the daily interest rate your credit card charges, divide your APR by 365 — the number of days in a year. The result you end up with — the daily periodic rate — is how much interest you’re charged every day you remain in debt.
In addition to interest, some credit cards charge application fees or an annual fee. The vast majority also charge late fees or over-the-limit fees. Depending on the card you sign up for, you may also find cash advance fees, foreign transaction fees charged over overseas purchases, and balance transfer fee. Fortunately, most of these fees are easily avoided.
How to get a credit card
If you think you’re ready to build credit but wonder how to apply for a credit card, we have good news. The internet offers a treasure trove of information that lets you shop around and compare cards without ever leaving your home. Better yet, you can fill out your credit card application online. If you get approved, you can receive your card in the mail in as little as a few days to a few weeks.
If you’re wondering how many credit cards you should have, the answer is different for everyone! Some people like to use one rewards or cash-back credit card for all their regular purchases, while others pick different cards for different situations. For example, people who travel a lot like to have a travel credit card that comes with no foreign transaction fees and consumer protections like trip cancellation/interruption insurance and baggage delay coverage. But they may also want a basic cash-back credit card to use at home.
The basic steps involved in actually getting a credit card include:
- Deciding on the type of credit card you want (low interest, rewards, etc.)
- Researching cards online
- Checking your credit score to see if you may be able to qualify
- Applying for the credit card you want online
Generally speaking, you’ll need to have good credit or a FICO score of 670 or higher to qualify for a credit card with the best terms, rewards, or a low interest rate. For a premier travel credit card from Chase or Capital One, you may even need very good credit — or a FICO score over 740. Because card issuers approve consumers based on many factors and don’t necessarily list minimum credit score requirements, these estimates are just a rule of thumb and not set in stone.
How many credit cards is too many? There’s no real “limit” provided you have a handle on your debt and don’t let yourself get overwhelmed. Most experts agree that a few credit cards (2-5) is probably enough.
How to get a credit card with bad credit or no credit score
If your credit is pretty bad, you may have to start your journey with a secured credit card. Where traditional credit cards offer an unsecured line of credit you can borrow against, secured credit cards require you to put down a cash deposit to secure your own credit line.
Is this ideal? Of course not. Can it help your credit score? You bet.
Keep in mind that your secured card doesn’t have to be your forever card. When you have a secured credit card long enough to boost your credit score, you can cancel it and move onto unsecured cards with better terms and no deposit required.
In addition to secured credit cards, there are also unsecured credit cards for “fair credit,” credit cards for people with a score in the 600’s, and even more options for people with scores over 700. There’s a credit card for everyone but the best rewards, rates, and terms go to those with excellent credit in the end.
If paying for credit repair is not for you, consider a credit-builder loan. Self Lender is a low-fee alternative to credit repair companies and secured credit cards, in that you don't have to put up any deposit. Instead, you set up a loan to repay yourself. This helps you build and repair credit, while also building a savings account.
What is a balance transfer credit card?
If you are struggling with credit card debt, you have probably considered a balance transfer card. This type of card offers 0% APR for a limited time — usually between 9 and 21 months. If you’re approved, you can transfer all your balances over and pay zero interest during your card’s introductory period.
Sounds pretty sweet, right? It certainly is, but you have to keep in mind that some credit cards change balance transfer fees between 3% and 5% of your balance. Paying this fee can be well worth it to score 0% APR for up to 21 months, but you should still take note and run the numbers to make sure it’s worth it.
How to use credit cards to build credit and improve your credit score
Once you have a credit card in your arsenal of tools, it’s crucial to make sure you’re using it to your advantage. Here’s exactly how to use credit cards to build credit and boost your credit score this year:
- Make only small purchases you can afford to pay off right away. When you use your credit card and pay it off, your credit movements will be reported to all three credit reporting agencies. This will help you build
credithistory and your score over time.
- Keep balances low. Most experts suggest keeping your utilization below 30% for the highest credit score possible.
- Pay your credit card bills early or on time. Don’t forget that your payment history makes up 35% of your FICO score. Late payments can damage your score in a big way, so don’t let them happen.
Check your free credit score at Credit Sesame >>
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Holly Johnson is a financial expert, award-winning writer, and Indiana mother of two who is obsessed with frugality, budgeting and travel. Her personal finance articles have been published in the U. S. News, Wall Street Journal, Fox Business, and Life Hacker. Holly is founder of of the family finance resource, ClubThrifty.com, and is the co-author of Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love. Learn more about Holly here.