How Credit Cards Can Help or Hurt Your Credit

When you go to the grocery store, shop online, or spend money anywhere else, you probably have a few options for how to pay. You can use cash, a debit card, a reloadable prepaid card like the Payactiv Visa Card*, or a credit card.

Debit cards are the most popular way to pay in the United States, and we’re big fans of debit at Payactiv as well. But credit cards can play an essential role in building or rebuilding credit, so it’s important to know how they work and how to use them responsibly. Here’s a closer look at how credit cards can help or hurt your credit, so you make the best credit-related decisions.

The Factors in Your Credit Score

The most popular credit score method is the FICO score, which relies on your credit report. Your credit report is a history of everything you’ve done with credit cards and loans for roughly the last ten years.

Your credit score is made up of five main factors:

• Payment History: 35%
• Credit Balances: 30%
• Credit History: 15%
• Credit Mix: 10%
• New Credit: 10%

As you can see, your payment history and credit balances alone make up about two-thirds of your credit score, so those are the most important places to focus. If you consistently pay your credit cards and loans by the due date and keep credit card balances low, your credit score should slowly increase over time.

How Credit Cards Can Help You Build Credit

Credit scores in the United States require you to have existing credit. It can be challenging to buy a home or a car with a loan with no credit or bad credit. And if you do get approved, you could pay a higher interest rate than those with good to excellent credit.

It can take years to build credit, so it’s best to start early with a credit card or two. When you have at least two credit accounts, you’re building a payment history, can show you keep credit balances low, and demonstrate that you’re responsible with credit.

You don’t have to carry a balance or pay every month to get credit for a positive payment history. You can open a credit card with no annual fee, use it to buy lunch every few months, and make sure you have automatic payments turned on, so you always pay the entire balance by the due date.

If you pay off your card in full every month, you don’t have to pay any interest charges. Having a credit card that you use once in a while for small purchases will keep your account active and help you build credit without risking going deep into debt.

You can use a credit card completely for free if you follow this strategy and avoid certain fee-bearing activities, like international payments and cash advances.

When you use credit cards responsibly, they’re a great tool. They can also improve your credit mix and the average age of your credit accounts over time. However, credit cards can also ruin your credit if you’re not careful.

Credit Cards Can Hurt Your Credit

If you sign up for a credit card, regularly carry a high balance from one month to the next, and get in the habit of missing the payment due date, your credit score will suffer.

Late and missed payments remain on your credit report for up to seven years and significantly drag down your credit score. Avoid those by turning on automatic payments for at least the minimum balance every month.

If you carry a high credit card balance, the good news is that paying your balance off is likely the quickest way to improve your credit score. The bad news is that’s easier said than done. If you use credit cards, it’s best to avoid spending more than you can afford to pay off every month by the due date.

Beware Interest Costs and Fees

We’ve mentioned it a few times already, but credit cards can be costly to use. If you don’t pay off your balance in full, take out cash advances, go over your credit limit, or do anything else that requires paying interest and fees, credit cards can cause you more financial harm than benefit.

To avoid using their credit cards irresponsibly, some savvy credit card users try these tricks:

• Keep the card in the back of a drawer: The simple “back of the drawer” trick keeps your credit card out of your wallet and easy access for impulse purchases. When it’s put away, you have to make a small effort before spending.
• Freeze the card in a block of ice: Consider freezing your credit cards in ice if you have a serious spending habit. When you want to buy something with credit, you have to wait for the ice to thaw while thinking about whether the purchase is worthwhile. Don’t put it in the microwave or boil it, or you risk destroying the card.

Some people use credit cards to earn miles and points or cash back rewards. These can be lucrative, but they’re rarely worth it if you pay interest charges and other hefty fees. Only consider these types of cards if you have good credit and are confident in keeping up on payments.

Credit Cards are Great for Building Credit… Sometimes

As long as you keep your balances low, always pay by the due date, and avoid applying for too many new cards, credit cards can help you build credit and improve your financial situation. But when you make too many missteps, those credit cards can wreck your credit while costing you a small fortune.

With a strong understanding of how credit cards work, you can make the best credit decisions. That can lead to many long-term benefits for your finances.

Payactiv helps you avoid debt

At Payactiv, we help people avoid credit card debt by letting them access their earned wages when they need them. Learn more about Payactiv’s financial management tools here. If your employer doesn’t offer Earned Wage Access (EWA), you can still get paid up to two days early¹ when you set up direct deposit on the Payactiv Visa Card. In a world where time is money, accessible pay can help you achieve your financial goals on your schedule.

The Payactiv Visa^® Prepaid Card is issued by Central Bank of Kansas City, Member FDIC, pursuant  to a license from Visa U.S.A. Inc. Certain fees, terms, and conditions are  associated with the approval, maintenance, and use of the Card. You  should consult your Cardholder Agreement and the Fee Schedule at  Payactiv.com/card411. If you have questions regarding the Card or such  fees, terms, and conditions, you can contact us toll-free at 877-747-5862,  24 hours a day, 7 days a week.

¹ Many (but not all) employers, government benefits providers, and other originators send direct deposits early with an effective of 1-2 days later. Beginning with your second direct deposit of at least $5 from the same source, Central Bank of Kansas City (CBKC) will post the funds to your Payactiv Visa Prepaid Card when we receive it, rather than on the effective date. This may result in your having access to the funds sooner. The date CBKC receives your direct deposit and the effective date are controlled by the originator.