How a credit card can help you rebuild your credit
Credit cards are not only a type of financial asset, but also an easy gateway to a better credit rating. Having a low credit score leads to high interest rates and in some cases, credit rejection when applying for new credit cards and loans.
Although this is a three-digit number, the credit score is the main factor that determines your access to loans; financial institutions use these numbers to assess a loan application and if it does not meet the credentials, a loan application will be rejected. These rejections can be alleviated with a credit card, which can help you rebuild your credit scores.
Using a credit card wisely can benefit your credit score through a combination of factors such as credit mix, payment history, and usage rate. Here’s how to do it.
Ways to Improve Your Credit Score Using a Credit Card
No matter how low your credit score seems to be, there are ways to restore it with a credit card. The process involves adopting habits that are reliable and known to be effective, such as:
Use a credit card designed to replenish credit
There are credit cards designed specifically for people who are building a credit history for the first time or who are rebuilding a bad credit history. The best of these cards will have features designed specifically to help you develop good credit habits and monitor improvements in your credit score.
The most common type of credit card for this situation is a secured credit card, which is backed by a monetary deposit, which acts as collateral for any accumulated debt. Often the deposit will be the same value as your new credit limit. A secured credit card may have easier qualifying standards, but can be costly if the deposit is a hindrance for you.
You can also look for unsecured credit cards that target people rebuilding their credit. Look for a card with no annual fee, with free credit monitoring, and the option to increase your credit limit. An unsecured credit card designed for people rebuilding their credit has all the benefits of a secure, no deposit credit card.
Avoid closing credit cards
Most people like to cancel their credit cards when they think they are no longer needed. This habit immediately lowers your total credit limit, which is essential in the process of building credit.
In short, the credit utilization rate, which represents 30% of the credit score, is determined by your current debt load as well as your total credit limit. For example, if you have two credit cards with a total credit limit of £ 25,000, your lowest balance should be £ 7,500 to positively reflect your credit score. Therefore, instead of closing your credit cards, they should be kept open to ensure your credit utilization rate improves.
A low credit score can make it difficult to obtain a credit card and can also increase interest rates. Therefore, making a concerted effort to improve your credit score through the use of a credit card has many long-term benefits. Make sure you are using your credit card wisely, making monthly fees that are paid off in full, in order to rebuild your credit score as quickly as possible.