What is credit?
Credit is the ability to borrow money that isn’t yours and pay it back later, usually with interest. Credit can also refer to your history of borrowing and repaying debt. You may have heard of the phrases, “good credit” and “bad credit.”
Credit is not inherently good or bad; rather, human behavior determines its effect. That is, how you use your credit can make all the difference in your finances.
For example, using credit passively can lead to “bad credit.” It can result from borrowing, swiping, or financing items without honestly knowing whether you can actually afford them. It can also lead to high interest charges, stress, and rejections for applications based on your credit score.
On the other hand, using your credit intentionally can lead to “good credit.” Only borrowing money and credit when you have carefully checked whether you can afford something, and making informed decisions about borrowing money for anything above your budget can lead to good credit.
Good credit can lead to a higher credit score, credit allowance increases, and application approvals.
Making your credit work for you simply means using your credit intentionally. It means having enough knowledge about credit to manage it, thereby reducing any associated fees and costs, and turning credit into an asset rather than a liability.
This guide will walk you through the mindset and habits to efficiently use your credit.
Your credit is more than just a score.
As I began explaining above, credit is money that you can temporarily access, but do not own. Your credit score defines how much lenders can trust you. Various factors determine your credit score, which typically ranges from 300 to 850.
Long story short, your score is a quick determinant of your credit status. FICO® Scores determine your creditworthiness and range from the following:
- Poor: under 580
- Fair: 580-669
- Good: 670-739
- Very Good: 740-780
- Excellent: over 780
Your creditworthiness affects:
- Loan approvals and interest rates (such as those for mortgages, auto loans, and business loans)
- Insurance premiums (some companies consider it)
- Rental and mortgage applications (landlords and mortgage lenders check credit reports)
- Job opportunities (some employers review your credit history along with a background check)
Suffice it to say that this three-digit credit score is important. Making credit work for you is all about controlling your credit habits to get a score that lands somewhere between good and excellent. By learning how to manage your credit, you can lower your borrowing costs and access opportunities that mere cash cannot access.
So, making credit cards and credit lines work for you means not only avoiding significant debt, but also using credit to strengthen your long-term financial position.
1. Shift Your Mindset to Frame Credit as a Tool, Not as Free Money
The first step to making credit work for you is to reframe it as a tool, not as additional expendable income. Think of your credit as a hammer.
A hammer can construct a house (your financial empire) or smash a window. Here are some thoughts that should come as a result of correctly using credit as a tool:
- “I can pay for this now and reimburse the cost within the next four weeks.”
- “This credit swipe will handle an expense before cash arrives, but I know can cover it in full soon.”
- “My credit card almost never has a balance. If it does, it’s very low or I’m in the process of paying it off before my next statement.”
- My budget planning did not pan out as I expected. I am facing a small discrepancy and can cover it with credit since I’ll be able to easily repay it next week.
Here are some ways you should NOT be thinking about credit:
- “My credit card is meant to increase my lifestyle! I’m going to use it at a fancy restaurant I wouldn’t normally be able to afford.”
- “I couldn’t afford a luxury vacation on my own, so I put it on credit.”
- “I don’t have cash on hand or income to cover rent for a while, so I will be using a personal loan to cover it for the next few months.”
Hopefully, this makes it easier to think about the importance of habits, and how to use your credit to positively affect your financial future.
2. Build a Strong Credit History
To optimize credit, you will need to own it. It is easier said than done to not be ashamed of your debt, credit score, or credit line amount. YOU OWN THAT DEBT. WORK THAT CREDIT SCORE.
Regardless of a high debt amount, low credit score, or low credit line – try to be grateful that you get to focus on building your credit – regardless of your starting point.
Focus on building a solid credit profile. To do this, aim for consistent, responsible use of credit over time, because this is what lenders look for when reviewing your credit history. Here’s how you can do this:
- ALWAYS, and I mean always, pay your credit card bill on time: Payment history makes up 35% of your credit score. Even one late payment can linger for years. So, even if it is the minimum payment, pay it on time!
- Keep your utilization rate low. Try to keep your utilization rate at less than 30% of your available credit. Lower is even better.
- Don’t close old accounts unnecessarily. The length of your credit history matters, so keep older cards open even if you have no use for them.
- Mix it up. A healthy mix of loans (such as student loans or mortgages) and revolving credit in the form of credit cards shows lenders that you can handle different types of credit.
- Don’t swipe because you “can.” Reprogram your mind to swipe only when you know you can easily afford it or pay it back within the next month.
- Avoid carrying a balance (owing money) unless it’s strategic (like borrowing with a 0% interest rate). Keep that balance as low as possible.
- If you see something, say something. Check your credit accounts frequently for any alerts or unusual activity. If something seems off, or if you see a transaction or an alert that looks unfamiliar, dispute it with your credit service provider.
3. Make Credit Card Work for You with Rewards & Perks
One of the most practical ways to make credit cards work for you is by learning about and maximizing rewards programs. Credit card companies want your business!! So much so, that they’re willing to pay for it. Here are some common rewards programs:
- Cash-back cards – These credit cards earn you a percentage back on purchases you’re already making. For example, if the credit card offers 1% cash back, and you spend $100, you will get $1 returned to your credit account.
- Travel rewards cards – These credit cards allow you to accumulate miles or points for flights, hotels, and upgrades through regularly spending with those cards.
- 0% APR cards – These cards make it easier to finance big purchases or transfer balances without paying interest for an introductory period (typically a few months; the key is to make sure you pay them off before the introductory period ends).
- Perks – Be sure to call your credit card company or do some research about all of the rewards and perks available through your credit cards. Some cards offer extended warranties, travel insurance, rental car coverage, and even airport lounge access!
It is important to only use these perks for expenses you would have made anyway with your own money. DO NOT “chase” rewards by overspending excessive amounts of money relative to your lifestyle and budget.
4. Make credit work strategically for money goals
Credit is usually utilized just for convenience, but it is built for so much more than that. It can be crucial to big financial stepping stones and important life milestones, for example:
- Buying a car – It is nearly impossible to buy a new or good car from a reputable seller without a decent credit score and history. Your credit will also affect your interest rate and monthly payment when financing a car.
- Buying a Home – A strong credit score can lower your mortgage rate, saving you a significant amount of hard-earned income.
- Starting a Business – Business credit cards or loans can provide helpful startup capital while keeping your personal finances separate.
When you make credit work for you, it becomes a bridge to bigger, life-altering opportunities and experiences.
5. Monitor, protect, and optimize your credit
Even if you manage your credit responsibly, mistakes and fraud still occur. I’ve been building my credit for 14 years, and I still get fraud alerts from my credit card company at least once a year. This can sometimes make you feel as though your efforts have been derailed. Stay proactive by:
- Checking your credit reports regularly at AnnualCreditReport.com (free once a year from each bureau). Or, by creating an account with any of the three credit bureaus: Equifax, Experian, and TransUnion.
- Setting up alerts for suspicious activity.
- Disputing errors immediately with your credit service provider. Inaccurate negative marks can drag down your score.
- Reviewing terms annually. Sometimes, you can negotiate a lower rate or request a credit limit increase to improve your utilization rate, and raise your overall credit score.
6. Avoid working harder than your credit
Even with the best intentions, many people fall into credit traps. Here’s how to avoid working unnecessarily hard for your credit:
- Pay more than the minimum balance every month. Interest builds quickly, and the goal is to avoid being caught in a situation where you are spending much more than you are paying off.
- Don’t apply for multiple cards at once. Each time you apply for a new line of credit, the credit provider performs a hard inquiry on your credit report. Multiple hard inquiries can lower your credit score. On that note, also avoid applications that will conduct a hard inquiry unnecessarily if you can (for example, ask a landlord if you can provide your own credit report if you have one from within the last year).
- Don’t fall for lifestyle creep. Just because your limit increases, doesn’t mean your budget should.
Remember, the goal isn’t to have more credit or rewards. It is to improve the quality of your credit habits to positively benefit your future financial outcomes.
Wrap-Up
To truly optimize credit, it’s best to think long-term. Every swipe and every payment adds to your credit history and ultimately affects your credit score.
Having a good credit score can help you to leverage credit into opportunities, such as lower interest rates on loans and access to rewards. When you learn about credit usage and shift positive credit habits, you’ll find that instead of working for your credit card company, your credit starts working for you.
Thank you so much for reading my article! I hope it was helpful. Please remember to subscribe and leave a comment! Check out the rest of the blog for more personal finance guides and tips!