I’ve always believed one of the fastest ways to raise your credit scores is with credit cards. Without the knowledge of how to properly use credit cards, you can quickly ruin your credit. When you compare auto loans, mortgages, and other big ticket loans to credit cards, credit cards are the fastest way to raise your scores. Huh? Credit cards are better than a mortgage to raise your credit score?
Sometimes, Big Ticket Items Does Very Little To Raise Your Credit Score
Yes. Items like mortgages and auto loans do positively affect your credit score if you make timely monthly payments without fail. Especially if you have the ability to pay them off early.
However, most individuals are unable to pay off large loans early. While big-ticket items will certainly help to raise your credit score over the long haul, to get your scores to move fast, big-ticket items are not the way to achieve that result. Yes, if you have $10,000 cash and you’re about to buy a car, why not buy the car and get a loan, and then pay the car off in two or three months just to have the activity on your credit. Keep in mind this way their will be additional financing fees, so look at your options carefully. If you don’t have $10,000 to buy a car cash or $200,000+ to buy a home cash, then the next best thing is through the use of credit cards.
Credit Cards – The Right Ways Builds Credit Fast
Credit card balances fluctuate constantly each month if they are being used and paid in full consistently. With this constant activity and smart use, credit cards can help improve scores very quickly. By keeping the balances low at any given time – no higher than 33% of the credit card limit – your scores will improve.
Credit card usage is discretionary spending. This means the activity on your credit report shows how you manage discretionary spending. A mortgage loan is considered fixed spending. As long as you’re an adult and living on your own you have to pay some type of housing expense. In the same token an auto loan is also considered a fixed expense.
Credit Cards And Discretionary Spending
Credit cards allow you to make purchases from a vast array of sources. When you do so, you are paying for items that are not specifically for fixed expenses – thus, discretionary spending. Yes, of course you can use your credit cards to pay your car loan, or in some cases, your mortgage. But this is at your discretion that you would use your credit card to pay those bills.
It stands to reason then, that if you have a large limit, for example $1000, and you only spending $200 to $300 of that credit each month, and pay it off in full or close to $0, the credit bureau’s scoring algorithm will look at that activity much more favorably. The opposite of that is someone who has maxed out their card and is just paying the minimum balance every month – albeit on time. It will appear that you have the ability to pay your bill and that you don’t need to use that credit card hence, the better credit score for that type of activity.
What’s Important To Know
The key is, paying off balances in full each month allows you to get a better score because you are paying off an item each month, or maybe every two months. You can do that more easily with a credit card. Big-ticket items are great, but if you’re trying to build your scores quickly then look at credit cards. Don’t be afraid of credit cards. They can be your friend.
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Andrea Davis is a licensed Real estate broker in the state of Georgia, many years experience working in the Atlanta real estate market, licensed since 1996. As a former loan officer, Andrea is passionate about educating buyers, sellers and renters, and firmly believes in the power of education and knowledge. Send questions to her at firstname.lastname@example.org.
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