Understanding how these cards work and knowing what to look out for will be useful in choosing one that helps you establish credit, qualify for loans, and unlock exclusive rewards. In this article, we show you how to pick the best credit card for building credit score and present five unique card options to explore.

What Is a Credit Builder Credit Card?

A credit builder credit card is a special card designed to help you establish a positive credit history or get your credit score back on track if you’ve previously been refused credit. You’ll find these cards useful if you’ve been having difficulty getting credit due to:

• Employment status or low income
• Poor credit history or low credit score
• Lack of a long-standing credit record 

A credit builder card comes with a small credit limit, often around $300, and a high annual percentage rate (APR). It reduces the lender’s risk of losing money if you’re unable to repay your debt. 

If you own a credit builder credit card, you’re responsible for making regular, on-time payments, usually a set monthly amount. Your payment history is reported to the major credit bureaus every month, making sure your payments have a positive impact on your score. However, if you default, you’ll have a higher interest to pay on outstanding balances. 

How Do Credit Builder Cards Help Build Your Score?

When you take out a credit builder card, you’ll experience a drop in your credit score—but only briefly. As you manage your card responsibly, you can reverse the dip and build a positive credit history. 

Here’s how a credit builder card helps you build your credit score:

• On-time payments—When you repay your loans on time and in full while staying within your credit limit, you demonstrate reliability and responsibility to lending companies. This will reflect in your score as you’ll notice it starts to climb higher. Having a high credit score can also enable you to increase your credit limit
• Reduced credit utilization—Keeping your balance low in comparison to your credit limit indicates you have a low credit utilization ratio. For instance, if your card has a $300 limit, and you spend $75 on your card, this means you have a 25% utilization ratio. Maintaining a low credit utilization ratio on your card positively affects your credit score
• Credit history building—If you don’t have a solid credit history, a credit builder card helps you establish one. As you make on-time payments and manage debts responsibly, you begin to establish a positive history, which is a key factor in determining your qualification for securing loans, renting apartments, buying gadgets, and more

The Benefits of a Credit Builder Card

In addition to helping you build a solid credit history, credit builder cards offer more advantages, such as:

• Qualifying you for the best financial deals—Having a good credit history on your card shows issuers that you use your credit responsibly. This means they can trust you with a higher credit limit and risk offering you lower interest rates on mortgages, auto loans, and personal loans because your records strongly suggest that you’ll repay your debt
• Providing you with a longer credit history—In addition to your utilization ratio and credit limit, your credit account age is another factor that determines how good your score will be. Opening a credit card account early and maintaining it helps you start building a history that will last on your report for as long as the account is open 
• Offering a low-risk credit building option—Credit builder cards are secured by your funds, minimizing the risks for you and the card issuer. You make a security deposit for the card, which serves as collateral. If you default in paying your debt, the issuer will use your deposit to cover the balance, and there’s no further financial impact 

Using a credit builder card wisely helps you lay a strong credit foundation for a more secure future.

What Is the Best Credit Card To Raise Your Credit Score?

There are several credit cards that raise your credit score, and they’re offered by various card issuers. Below are listed five of the best options, depending on your financial needs and goals: 

1. Capital One Platinum Credit Card (best for average credit)
2. Discover It^® Secured Credit Card (best secured credit card)
3. Capital One Platinum Secured Credit Card (best low deposit card)
4. Bank of America^® Customized Cash Rewards Secured (best for cash back)
5. Surge^® Platinum Mastercard^® (best for rebuilding credit)

Capital One Platinum Credit Card (Best for Average Credit)

The Capital One Platinum Credit Card is a credit builder card that offers the opportunity to upgrade to a higher credit line within six months. This card is ideal for people looking to build a good-to-excellent credit history with no strings attached. 

Your consistent on-time payments are reported to credit bureaus, significantly impacting your credit score. Keeping your credit utilization low on the card also positively influences your credit score. You need only limited to fair credit to apply for this card, and it charges no annual fees. However, you will need to pay a 4% balance transfer fee on each transferred balance.

The main benefits of this card include:

• No annual fee 
• No foreign transaction fees
• $0 fraud liability coverage
• Mastercard ID Theft Protection 
• Free credit score monitoring from Capital One

Discover It^® Secured Credit Card (Best Secured Credit Card)

If you want a solution that allows you to earn rewards while you build your credit, this card by Discover may be a good fit. The Discover It^® card is fitting for those who need a secured card plus all its perks, and a healthy cash back program. 

Responsibly managing your credit on this card raises your credit score by 30+ points. Seven months after opening it, Discover reviews your account to see if you qualify to be transitioned to an unsecured line of credit so they can return your deposit.

In addition to cash back rewards, this card offers various security features, including Social Security number (SSN) monitoring and alerts and free removal of personal data from people-search sites to prevent identity theft.

The key perks of this card include:

• A welcome bonus to match your entire cash back in the first year
• No annual fee
• Low minimum starting deposit of $200
• No minimal credit score requirement to apply

Capital One Platinum Secured Credit Card (Best Low Deposit Card)

This card is a solid option if you have limited credit and are looking for a low-deposit secured card. 

The card offers various minimum security deposits from as low as $49, allowing you to access a $200 credit limit. You can also earn your deposit back as a statement credit if you make on-time payments. 

This is an excellent option if you’re just starting to build or rebuild your credit since your credit score doesn’t determine your approval. After six months of opening an account, you’ll be automatically considered for a higher credit line with no need for an extra deposit.

With this convenient low-deposit card, you get:

• $0 fraud liability
• Free credit score monitoring
• No foreign transfer fees
• Flexible changes to payment due date 

Bank of America^® Customized Cash Rewards Secured (Best for Cash Back)

This secured card by Bank of America allows you to build credit while earning 3% cash back in any category of your choice. You earn an automatic 2% cash back at grocery stores on the first $2,500 spent each quarter and unlimited $1 cash back on every other purchase. You can change your preferred category monthly or stick to the same category forever. 

To open an account, you’ll need to make a deposit of at least $200, which will be combined with your income to establish your credit line. Using the card responsibly over time will help improve your credit score, and you can check your score for free after a few months.

Cardholders enjoy the following:

• No annual fee
• Competitive cash back rates
• $0 Liability Guarantee
• Free account alerts
• Overdraft protection

Surge^® Platinum Mastercard^® (Best for Rebuilding Credit)

This card is viable if you need to rebuild your credit after experiencing credit issues. It offers an opportunity to bounce back from past credit problems like bankruptcy or foreclosure. Surge Platinum requires no security deposit to open an account and offers up to a $1,000 initial credit limit.

The card issuer reports payment history to all three credit bureaus for prompt updates to your credit score, and with responsible use, you’ll be able to improve it. Before you apply, check if you qualify for the card—it has no impact on your credit score.

Note that Surge Platinum charges a high annual fee, and most card charges incur a fee as well.

With Surge Platinum, you’re guaranteed:

• Mastercard Zero Liability Protection
• Ability to apply even with a poor or fair credit score

Credit Builder Card Comparison Table

The table below shares a general comparison between the credit builder cards, enabling you to decide the best option for you:

In addition to these basic features, all the cards also offer varying security and ID protection features. 

How To Get a Credit Builder Card

Obtaining a credit builder credit card includes the following stages:

1. Improve your credit score—Even though these types of cards are generally designed for people with low scores, it doesn’t mean you’ll get automatic approval. Consider taking steps to build your existing credit score to increase your chances of approval
2. Check your eligibility—You can verify your eligibility status with a credit card comparison tool. The tool will show you your eligibility rating for different builder cards so you know where you stand
3. Apply for the card—Send in an application to the financial institution of choice offering credit builder cards 
4. Wait for the lenders’ checks—After applying for credit cards that build your credit score, the lender will make a hard inquiry on your report and also use their company criteria to decide if they should lend to you. They’ll consider your account information, credit report, and any data they have on your credit to help them decide 
5. Get approved—After reviewing your application, the lender will inform you of their decision. If approved, you’ll be required to deposit funds into a savings account, which will serve as a collateral for your credit limit

Note that when a hard inquiry is made, it can further reduce your score, making you less eligible for a card. Avoid applying for many credit cards within a short period so you don’t incur multiple hard inquiries and damage your score significantly. 

What To Look for When Choosing a Credit Builder Card 

Before you choose a credit builder card, ensure it ticks the following boxes:

1. Reports your credit history to all the credit bureaus
2. Allows you to check if you’re pre-approved before you apply
3. Offers a seamless upgrade to a better card with more perks
4. Offers more rewards than fees or charges

Is a Credit Card the Only Way To Build Good Credit?

No, a credit card is not the only way to build or rebuild your credit score. There are other ways to demonstrate good credit responsibility. For instance, paying your mobile phone contract or household utility bills on time and in full shows you’re a reliable borrower.

You can also work with a credit building solution like CreditStrong to grow and maintain a good credit score. The platform combines a secured consumer installment loan or a revolving line of credit with a savings account to enable you to build credit and grow your savings. 

CreditStrong—Your Trusted Credit Building Partner

CreditStrong is a reliable and trustworthy independent community bank—a division of Austin Capital Bank—that works with the three major credit bureaus in the U.S. to help you build your credit score. 

CreditStrong is designed to help you build credit from the beginning or back from past damage, with the possibility of growing your savings simultaneously. 

Opening an account on this platform does not trigger a hard credit inquiry, so your existing score remains untouched. It also offers a better option than secured credit cards since you don’t have to pay a deposit—you build credit by saving, not spending.

Building Your Credit Score With CreditStrong Accounts

CreditStrong offers three accounts that help build credit—Instal/CS Max, MAGNUM, and Revolv. These accounts empower you to add bank credit and positive payment history to your credit profile at a low cost.

The following table explains how each of the accounts functions:

Once you’ve paid off the balance on your accounts, you can choose to continue saving and earning interest on your account or transfer the funds immediately. You can also close these accounts at any time with no termination fee attached.

How To Open a CreditStrong Account

Opening a CreditStrong account is straightforward. All you have to do is follow these steps: 

1. Click here to get started
2. Select the preferred product that aligns with your credit building goals:
   • MAGNUM (starting at $30/month)—Ideal for rapid credit building
   • Revolv ($99/year)—Perfect for credit building with a high credit balance
   • Instal (starting at $28/month)—Great for building credit while saving
3. Apply by submitting the required information
4. Monitor your credit score, savings, and payments through the CreditStrong dashboard

The post Best Credit Card for Building Credit Score—5 Recommendations appeared first on Credit Strong.

Whether you’re looking to build credit, earn rewards or pay down high-interest debt, there’s a credit card that likely fits your needs. There are so many types of credit cards and welcome bonuses that it could make anyone’s head swim! 

We’ll go over each credit card type so you can identify which type of cards and rewards are best for you. We’ll even include the credit score you’ll need to aim for with each one.  

Different Types of Credit Cards

Secured Credit Cards

A secured credit card is specifically designed for credit beginners and people who’ve had past issues with their credit. Typically you’ll only get denied for this one with serious delinquency or a recent bankruptcy on your credit report.

These types of credit cards require a security deposit of about $200-$300 which becomes your credit limit. The problem with these is that you have to be extremely disciplined to avoid going over the suggested utilization rate because the credit limit is so low. 

The only way to raise the credit limit is to put down more money. This puts people who struggle with credit in a bad position. With a single purchase of $100, you’re already at 33% to 50% of your credit utilization (depending on your deposit) which actually lowers your credit score.

A better solution to a secured credit card is Credit Strong’s Revolv account. It’s a revolving credit account that helps you build credit without going into credit card debt. Payment suggestions are optimized to keep your utilization rate in check and you’re saving money.  

Find out which Revolv plan would work for you and get started building your credit!

Unsecured Credit Cards

When referring to an unsecured credit card, it could mean one of two things. It might refer to standard credit cards with no purchase reward. These are your run-of-the-mill credit cards without the bells and whistles. It can also refer to many of the other cards on this list. 

Unsecured credit cards are technically any type of credit card that doesn’t call for a security deposit. While you won’t need to put money down, most require a credit score of at least 670 and up to be approved. 

Minus the secured credit card, the rest of the cards on this list are unsecured. Depending on the credit card issuer, there may be an annual fee. Some of them even carry rewards which we’ll dive into soon. 

A few financial institutions offer unsecured credit cards for people with lower credit in the 580 to 669 range. However, you’ll likely pay for having lower credit with a higher interest rate or an annual fee. 

Unsecured credit cards are best because your money isn’t tied up in a security deposit, so you can use it for other things. The credit limit for these cards can vary widely based on your credit score, income levels, and which card issuer you choose. 

Business Credit Cards

Business credit cards are helpful for entrepreneurs looking to get rewarded for their company purchases or simply free up some cash flow. These are particularly helpful for keeping business and personal expenses separated. 

Business credit cards also come in the form of charge cards which are linked to your business bank account. Some business credit cards also offer account opening bonuses along with cash back and travel rewards. 

Depending on the card issuer you go with, you’ll need to meet a few qualifications.

• You’ll need a personal credit score of at least 680 in most cases
• Some cards require a personal guarantee
• There may be a time in business requirement of 1-2 years
• Your business will need to produce adequate income to qualify 

Rewards Credit Cards

A rewards credit card is best for everyday purchases. They offer redeemable points that can be exchanged for:

• Merchandise
• Travel
• Gift cards
• A statement credit 
• Or cash

One option is to get a card with a set rate of points earned on all eligible purchases. If you swipe your card more often in one category, some rewards cards offer a higher percentage of rewards on purchases in certain categories like dining, gas, or groceries. 

A rewards credit card works best when you pay off the card regularly and avoid any interest charges that come with holding a balance. Mainly because it can quickly cancel out the value of any rewards you’re getting back. 

The downside to using a card with rewards points is that the cash conversion isn’t easy to calculate in most cases. For example, the cash value of your rewards points might be less than if you decided to exchange the points for merchandise or a gift card. 

A rewards credit card approval is typically granted for credit scores starting at 670 and up. The better your credit score is, the better chance you’ll have of getting approved for a rewards card.  

Cash Back Credit Cards

Don’t want to hassle with converting rewards points to a monetary value? You won’t be restricted to what you can redeem rewards for either. Get cold hard cash delivered directly to your credit card balance or your bank account. 

Cash-back credit cards come in two forms. A flat rate card and a card with bonus percentages based on specific spending categories. Sometimes you may find a combination of the two. 

It’s easy to find a cash-back credit card with no annual fee. If you do come across one with a fee it’s usually not expensive. Most times it’s less than $100. 

It’s important to check for minimum redemption amounts with cash back credit cards. This prevents you from cashing out until you reach a certain amount. 

Another downside is that cash-back cards usually charge higher interest rates, but if you’re paying off your balance month to month you won’t have to worry about that often. 

The average credit score to get approved for cash back credit cards ranges from 670 to 850, but there are also a few credit cards with cash rewards that approve people with fair credit (580 to 669). 

Travel Credit Cards

If you enjoy collecting experiences around the world with great accommodations then a travel credit card might be the winner for you. Earn miles or points to redeem for flights, hotel stays, baggage fees, and more. In addition to the earned points or miles, you’ll find extra perks like:

• Access to exclusive airport lounges
• Concierge service
• Free TSA Precheck or Global entry
• Travel credits
• Priority boarding
• Status with partner hotels and airlines

Travel credit cards offer great rewards and regularly have introductory bonuses to persuade potential cardholders. Some of the travel cards offering the best rewards come with hefty annual fees. On the higher end, this looks like $395 to $695 annually.

Lower-cost annual fees start at about $95. If you shop around you’ll likely find a few cards that waive your first year’s fee or don’t have one at all. To start earning travel rewards you’ll need a credit score in the good to excellent range (700 to 850).  

Student Credit Cards

Student credit cards are specifically for young adults who are just starting their credit journey and likely have limited or no credit history. These cards are easier to get approved for because their application standards aren’t as rigorous. There are a few stipulations to meet though.

• You’ll need to be enrolled at an accredited educational institution.
• You have to be at least 18
• If you’re under 21 you’ll need a cosigner or proof of independent income
• Applicants under 21 have to fill out a written paper application

Typically student credit cards don’t charge an annual fee and some even offer rewards on eligible net purchases. Since your credit history is little to none, you’ll also see higher interest rates compared to other unsecured credit cards. 

If you’re a student looking to build credit, do your research on how to build credit responsibly before applying for a student credit card. And never spend more than what you can afford.

Co-branded Credit Cards

Co-branded credit cards combine the benefits of one brand with the credit card rewards of a traditional credit card company. Oftentimes, you’ll find this when Amex, CitiBank, Chase, or Discover have partnered with a hotel chain or airline to provide travel rewards. 

It’s not just limited to airlines and hotels. This can also apply to retail stores such as Costco or Starbucks. It’s meant to reward brand loyalty and these types of cards work best with brands you’re already spending money with regularly.

In terms of travel rewards, co-branded credit cards offer their customers some of the best benefits and purchase rewards for using the card. It can include: 

• Discounted hotel stays 
• Reduced or free baggage fees
• A higher percentage of airline miles with each purchase
• Large sign-up bonuses at account opening

The average credit score for these cards is about the same as most travel credit cards which require good to excellent credit. 

Store Credit Cards

When the cashier asks if you want to get 15% off of your purchase by applying for a store credit card, most times your answer should be a firm “No”. While you might get a percentage off your purchase that day, these cards have several downsides.  

• Store credit cards limit you to one store or group of stores
• They offer some of the worst APRs
• The fee structures are notoriously costly
• Credit limits are usually low 

Some store cards even charge deferred interest when you sign up for their 0% APR intro offer. So if your balance isn’t paid off by the end of the promotional period, you’ll pay retroactive interest on the remaining balance. 

All store credit cards aren’t bad though. Some of the best credit cards in this category include–

• Target RedCard: 5% off at target, can be used outside of Target, and no annual fee.

• Costco Anywhere Visa Card by Citi: No annual fee with a Costco membership, cashback rewards, and APR as low as 18.24%. 

• Amazon Prime Rewards Visa Signature Card: High cash back rewards, use outside of Amazon, and concierge service.

Credit Cards for Transferring Debt

If your existing credit card balances are overwhelming due to high-interest rates, you could find a credit card with a balance transfer offer. These credit cards typically have an introductory interest rate of 0% for about 15 to 21 months. 

To transfer balances to your new 0 APR card, you’ll have to pay a balance transfer fee. These fees are 3%-5% of the total balance being transferred. If you have multiple credit cards that you’re transferring balances from, you’ll have to pay the balance transfer fee for each one.

Even though you’re paying a balance transfer fee you stand to save tons of money by having a few months of interest-free payments. These cards are available to people with good credit of about 690 and above. 

0% Introductory APR Cards

If you’re looking to make a big purchase soon and want time to pay it off without interest, try a 0% introductory APR card. These credit cards can give you up to 18 months to pay off the balance without paying any interest.

Budget out how you’ll pay the card off within the promotional period if you’re serious about avoiding interest charges. You can also find cards that offer interest rates that are lower than average for a promotional period. 

Virtual Cards

Virtual credit cards are a protective measure you can use to prevent identity theft and fraud when you shop online. It’s a unique temporary number connected to a credit card already in your name. It’s not a separate card. 

When using a virtual credit card with an online merchant, you can simply close the virtual card if a data breach occurs without affecting your main credit card. 

Some banks already provide access to virtual credit cards to protect their consumers from fraud. Capital One and Citibank are currently leading the charge. 

There are two downsides to using a virtual card: 

1. Processing a refund through a virtual card takes more time than using a regular card. 
2. Some virtual cards have short expirations. So it could create a lapse in any subscriptions connected to it. 

What type of credit card should I get?

The type of card you get depends on a few factors:

• Your credit history and credit score
• What you spend money on
• Any existing credit card debt
• What rewards you prefer

If you have an excellent credit score and love traveling, you may want to try a travel rewards card. If you’re fixing bad credit issues and need to bounce back, try a secured credit card or a Credit Strong Revolv account after correcting any credit card errors. 

To find the best credit card for you, start by taking note of your lifestyle. Take stock of what you typically swipe your debit card for to see if you might benefit from a card with category bonuses. Consider what rewards you’d like to receive to improve your experience. 

You should also analyze any existing credit card debt and determine whether it’s a priority to pay less interest on your balances. Pair all of these factors with information about your credit score and debt habits to find out which credit card is best for you. 

The post 12 Types of Credit Cards For Every Need And Credit Score appeared first on Credit Strong.

Getting declined for a credit card can be frustrating, but it’s only a temporary setback. There is a way to appeal the decision, and you can always strengthen your application and try again in a few months.

If a credit card issuer recently denied your application, here’s what you need to know to move forward, including the most common reasons for rejection and the steps you can take to prevent it from happening again.

Reasons for Being Declined for a Credit Card

There are many potential reasons for a declined credit card application. Here are some of the most common causes to help you figure out what happened to you and how to resolve the issue. 

Negative Payment History

Payment history is worth 35% of your FICO score, making it the most significant factor affecting your credit. All your monthly debt payments must be on time to maximize your score. The longer your track record of doing so, the better.

If your credit report shows that you’ve missed one or more credit card debt payments in the past, a company may decide not to offer you an account. Unfortunately, a late payment stays on your credit report for seven years.

That said, they become less impactful over time. If you only missed one credit card payment a few years ago, it’s likely that something else contributed to your application denial.

Too Much Outstanding Debt

How much debt you owe is worth 30% of your FICO score. That makes it the second most significant credit scoring factor after your payment history and almost as impactful.

If a credit card company believes you’re near the maximum amount of debt you can afford, they won’t give you any more for fear that you’ll fail to pay them back.

One way creditors gauge whether you’re near that threshold is via your credit utilization ratio. It equals your outstanding balances divided by your credit limit. For example, your utilization is 25% if you owe $1,000 on a card with $4,000 total available credit.

While there’s no official maximum that creditors will tolerate, lower ratios are better. General wisdom says you’re safe as long as you’re below 30%, but somewhere between 1% and 10% is best for your credit score.

Too Many Recent Applications

Every time you apply for a new credit account, your prospective creditor checks your credit and adds a hard inquiry to your credit report. Each of these lowers your FICO score, and too many in quick succession is a red flag to lenders.

For example, if you’ve applied for half a dozen credit cards in the last two months, creditors will probably suspect that you’re in financial distress and decide not to offer you an account.

Alternatively, you could run into anti-churning restrictions that stop consumers from opening accounts for the sign-up bonuses. For example, Chase will decline your credit card application if you’ve opened five cards in the last 24 months.

Recent Credit Mistakes

Credit card companies emphasize recent events more than older ones. Your latest behavior is their best predictor of your future actions.

As a result, making mistakes that harm your credit right before you apply for a new card can cause them to reject your application, even if they’re relatively minor.

For example, you’ll likely struggle to qualify for a credit card if you missed a debt payment a few weeks before applying.

Insufficient Income

In addition to checking your credit score and reviewing your credit report, credit card issuers will consider your income before lending to you. They’re legally required to check that you earn enough money to repay your debts.

As a result, creditors always ask for your annual income and its source, and they may ask for proof. For example, if traditional employment is your primary source of income, they could request your last few pay stubs.

Unstable Work History

Not only do card issuers want confirmation that you earn an income high enough to pay your debts, but they also want to know you’ll maintain access to it. If they suspect your earnings aren’t stable, you might not qualify for a credit card. 

For example, a card issuing bank may require that you maintain your current employment for at least six months. If you just entered the workforce or bounced between jobs too rapidly, they could reject your application.

Thin Credit File

If you’re applying for your first credit card, a thin credit file is a common reason for rejection. When your credit history is limited, it can cause you to have a low credit score or prevent you from generating one altogether.

Lenders usually want to see that you have a history of handling credit responsibly before they’ll offer you an account. As a result, most will reject your application if they find out you’ve never managed any debt before.

While that seems like a catch-22, there are many ways to get your first credit account. After all, everyone has to start somewhere. For example, you could apply for a secured credit card or get a cosigner to guarantee your debts.

Additional Age Restrictions

If you’re under the age of 21, you’ll have more difficulty qualifying for a credit card than someone who is older. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD) imposes additional restrictions on offering cards to younger people.

First, you can’t qualify for any credit card while under the age of 18. You can only access a credit line as a minor if someone adds you to an account as an authorized user.

If you’re 18 to 20 years old, you need proof of independent income or a qualified cosigner to get a credit card. Meanwhile, someone older than 21 can list any income they can reasonably expect to access.

For example, someone aged 25 could qualify for a credit card by listing their significant other’s income, even though they don’t necessarily have any legal right to access it, but someone aged 19 couldn’t.

What Happens After You’re Denied a Credit Card?

When you’re denied a credit card, the provider is required to send you an adverse action notice. That might sound intimidating, but it’s just a letter explaining their reasons for rejecting your application. You should expect it within a couple of weeks.

Otherwise, not much else happens when a card issuer denies your request for an account. Your score won’t suffer any more than it would if you’d received approval.

However, that doesn’t mean you can apply for credit cards recklessly. Remember, you add a hard inquiry to your credit report whenever you request a new account, whether you get approved or denied. Each one can take around five points off your score.

How To Make Sure You’re Approved the Next Time

Getting denied for a credit card you wanted is disappointing, but try to think of it as an opportunity to improve. Here’s a step-by-step guide to help you learn from the rejection, develop your credit or finances, and get a more positive response next time you apply.

Review Your Adverse Action Notice

When a creditor denies your application for an account, you should receive an adverse action notice explaining their reasons for rejecting you within a couple of weeks, although they technically have 60 days to get it to you.

The notice provides insight into your shortcomings, which are your best opportunities for improvement. If the issue is your credit, they must also share the score and the credit bureau they used.

Your adverse action notice won’t go into too much detail, but it should tell you which aspect of your credit is holding you back the most. For example, it could be your payment history or amounts owed.

Review Your Credit Report

If your adverse action notice indicated that your credit was the problem, pull your reports from Equifax, Experian, and TransUnion. They can provide a more detailed picture of your credit that’s invaluable as you work to improve your application.

Use your reports to investigate the scoring factor your letter claimed was the most problematic. For example, if it says your outstanding debt balances were too high, your credit report can show you which accounts are causing the most problems.

Fortunately, you can get a copy of all three major credit reports for free each year from AnnualCreditReport.com.

Dispute Any Errors

Unfortunately, the credit bureaus who compile your information into credit reports are far from infallible. In fact, they make mistakes that can negatively impact your ability to qualify for credit surprisingly often.

One recent study by Consumer Reports showed that 34% of participants found at least one error in their credit reports. As a result, it’s well worth going through each of yours to confirm their accuracy.

If you find any information that you believe is incorrect, you can dispute it with the credit bureaus. Fortunately, Experian, Equifax, and TransUnion all let you initiate the process through their online portals.

Improve Your Credit Score

If your credit was the reason you didn’t qualify for your desired card, spend at least a few months building it before you try again. Typically, your payment history and amounts owed are the best areas to focus on improving.

Fortunately, your payment history has never been easier to build. Even if you can’t qualify for a credit card, you can take out a credit-builder loan like CreditStrong’s to help.

We keep your loan proceeds in a locked savings account during the life of the loan, so there’s no credit check to apply, and you can qualify even with a bad credit score. And unlike a secure credit card, you don’t need to provide the collateral.

If your outstanding debt levels are holding you back, focus on paying them down as aggressively as possible. Tighten your budget and devote every spare dollar to chipping your balances away.

Bolster Your Income

If your adverse action notice indicates that insufficient funds were the primary reason for your application rejection, increase your earning power before applying again.

Negotiating a raise at work might be difficult, but picking up an easy side hustle can also improve your chances. Creditors are willing to consider self-employment income in addition to your W-2 wages.

If you have other income sources, such as interest income from a savings account or a college scholarship, make sure to include those on your application too.

Get a Qualified Cosigner

One of the easiest ways to improve the strength of your credit application is to get a qualified cosigner to guarantee your debts. If you default, they’re responsible for paying your balances, which makes you a much safer lending prospect.

As a result, it’ll be much easier to qualify for most credit accounts. Just make sure you get a cosigner with a good credit score and a healthy income, or they won’t be able to add as much value to your application.

Consider More Accessible Credit Cards

Credit card issuers create their products with specific target customers in mind. For example, each one’s best credit card and rewards program is going to be for people with excellent credit scores.

If you apply for one of these accounts too early, your chances of qualifying will be low. Instead, go after accounts created for consumers with your credit rating.

Once you’ve bolstered your application strength as much as possible, take an honest look at your credit and see if you can realistically qualify for the account you applied for previously.

If you’re still not confident that you can get the card, consider targeting one that’s more accessible, such as a student credit card or a secured card.

FAQs

How Do I Ask for a Reconsideration?

You can ask for a reconsideration of your credit card denial by calling the credit card issuer’s customer service or sending them a letter. It’s best to do this within a few days of the decision to avoid it counting as a new application.

To be successful, you generally need to provide new information that addresses the reason for your rejection. For example, if your income was deemed too low, you might get a provider to reconsider by showing them that you just got a raise at work.

Does Getting Declined for a Credit Card Hurt Your Score?

Fortunately, getting declined for a credit card doesn’t hurt your score. At least, it doesn’t do any more damage than you would experience if you had received a positive response from your prospective card issuer.

Whenever you apply for a new credit card or loan, the creditor checks your credit score and adds a hard inquiry to your credit report. Each of these costs you a few points, but your score should recover in a year.

How Long Do I Have To Wait To Apply for a Credit Card After Being Denied?

Technically, getting a declined card application doesn’t prevent you from reapplying immediately. However, it’s usually best to wait around six months before trying again.

Not only does that give you enough time to work on the aspects of your application that need improvement, but it also lets your score recover from the hard inquiry and shows lenders that you’re not desperate for credit.

How Much Income Do You Need for a Credit Card?

There’s no universal income necessary for a credit card account. Minimums can vary between cards. For example, secured credit cards may have lower income requirements than high-tier travel rewards cards.

Unfortunately, credit card companies don’t generally publish their requirements, so there’s no way to know how much income you need to qualify.

However, gross income shouldn’t limit you significantly if you have a full-time job and a reasonable salary. Lenders can adjust your credit limit to match your earning power.

The post Declined for a Credit Card: What to Do Next appeared first on Credit Strong.

Credit card churning is an advanced strategy that requires significant organization and attention to take full advantage of it. That being said, you shouldn’t use this if you’re a beginner because it could easily leave you overwhelmed, confused, and in significant debt. 

If you’re just getting started, check out our other guide instead: How To Use A Credit Card To Build Credit.

With that out of the way, credit card churning makes opening a new credit card profitable by taking advantage of introductory offers before closing the cards. If you have good credit, there’s no shortage of incentives to earn from opening a new credit card. 

What Is Credit Card Churning?

Credit card churning is a tactic used by advanced credit card users to capitalize on a credit card’s introductory offers. The rewards for opening a new credit card include airline miles, redeemable points, or even cashback. There are also extra perks to sweeten the deal. 

A skilled credit card churner looks for multiple cards offering the rewards they want. They apply for those cards and when approved, they fulfill the spending requirements to earn the reward. Once they get the credit card bonus, they close the card or downgrade it.

Wash, rinse, and repeat. 

If you’re really good at this, you’re basically getting rewards for free because you’re paying off any balances before the billing period ends. So you’re not paying any interest, you’re not paying an annual fee, and you’re rewarded for spending on purchases you were already going to make. 

It sounds tantalizing, but there are drawbacks to using this method of reward hunting. It requires airtight organization, tracking, and discipline to make credit card churning work. If you nail down a solid strategy and maintain control of your spending, this could be the start of something good. 

Pros of Credit Card Churning

Several benefits come with credit card churning, which is why it’s become such a popular strategy for credit card aficionados. With a bit of effort and a solid spreadsheet, you might be able to rack up some serious rewards for things you’re already spending money on. 

The entire point behind churning is to earn credit card rewards without paying interest or fees. If you have the organizational skills to pay your balances off ahead of the billing date, meet all of the spending requirements, and avoid annual fees like the plague then this might be for you.

Free* Rewards

The rewards aren’t exactly free. You’ll need to meet specific stipulations first. 

For example, the Amex Everyday Credit Card offers a welcome bonus of 10,000 membership rewards points when you spend $2,000 in the first six months. No annual fee. Plus you earn more points when you shop within certain categories.  

Typically, higher rewards come with higher annual fees. For example, applicants with excellent credit can get the Capital One Venture X card which offers a welcome bonus of–

• 75,000 travel miles
• $300 annual travel credit
• $100 towards TSA PreCheck
• 10,000-mile anniversary bonus (worth $100 towards travel)

The downside is a whopping annual fee of $395. It’s important to do a cost-benefit analysis of any card you’re considering beforehand to make the best decisions regarding the rewards and any associated fees. 

Waived Annual Fees

To attract new customers, many credit card issuers will waive the annual fee for the first year. When this is combined with an attractive promotional offer, it’s a great deal. That means you’ll get to use all of the benefits that come with being a cardholder without the extra cost. 

If you don’t find the card valuable enough to hold onto, be sure to close the card or downgrade to a credit card option with no annual fee before your 12th billing cycle arrives.

0% APR Offers

Another big perk of churning cards is the 0% APR offers. This is the most helpful when transferring a balance from a high-interest card, but there are also 0% APR offers on purchases too. 

These offers typically last 12-21 months. After the no-interest period ends, any remaining balance gets hit with the standard interest rate for that card. 

Partnership Benefits 

Many times, credit card issuers will team up with other companies to offer premier rewards for new account holders. You’ll find this most often with travel rewards credit cards. 

A credit card issuer like Amex or Citibank might partner with an airline or a hotel to offer rewards specifically for booking with them. For customers, this means extra benefits like the use of an airport lounge, free checked bags, discounted hotel stays, or flight upgrades.

Disadvantages of Credit Card Churning

The internet is full of stories from travelers who got free flights, hotel stays, thousands in cash back, and more credit card bonuses that would make anyone want to try this. However, we have to look at the whole picture and that includes the disadvantages of credit card churning. 

Requires Airtight Organization

To avoid the annual fees and monthly interest that accumulate when you lose track of a credit card, you’ll need to stay organized. This means you’ll likely need to establish:

• A living spreadsheet compiling balances, spending requirements, annual fees, payment dates, credit utilization, etc. for each card. 
• Calendar alerts for all important dates (payment dates, end of the promotional period, annual fee assessment dates). 
• Setting up automated alerts and auto payments for each credit card. 

Keeping up with multiple cards is time-consuming. If you’re not organized, it could mean missed payments, missed promotions, and costly fees. That cuts into any rewards you might receive.  

Messing Up Is Expensive

If you’ve managed multiples of anything, you know it’s easy to miss something due to an oversight. This gets expensive when you’re talking about credit cards. If you’re juggling multiple cards and miss a payment by one day it results in late fees that average about $34. 

Late payments will also put a dent in your credit score. That makes it more expensive for you to borrow money for important purchases like a mortgage or auto loan for the next two years.

Annual Fees

Most times, the cards with the best promotional rewards often have the highest annual fees. You might be able to catch one where the first year is free, but after that, it automatically renews for the full price. 

The point of churning credit cards is to avoid those fees and take home the rewards. If you forget to cancel the card or downgrade before the annual fee hits, it’s even more expensive. Depending on the type of card you get, you could be paying a few hundred dollars.

Risk to Your Credit Score

Taking on a little risk to earn hefty rewards is ideal, but there’s a bigger risk to your credit score. Although it’s only about 10% of the overall calculation, the number of new credit applications on your credit report could create a dip in your credit score. We’ll talk more about this later.

Experienced churners typically apply for multiple credit cards at once. To the credit bureaus and future lenders, this looks like a sign of desperation that usually foretells financial troubles. There’s also typically an increase in your credit utilization rate before paying off your balances. 

To combat this, these super consumers space out their bulk credit applications by at least six months or more. Plus they take other measures to keep their credit scores in the excellent range and minimize the damage. 

Potential for Increased Debt and No Reward

Without significant self-control and discipline, it’s easy to get carried away with the huge spending requirements attached to promotional offers. You know your income and personal finance habits better than anyone else. If you can’t afford it, don’t commit to spending it. 

If you’re not great with using credit cards responsibly or are less than meticulous with organization, this strategy has the potential to put you in more credit card debt. Plus, If you miss the minimum spending requirement, even by a small amount, you won’t get the signup bonus. 

How Credit Card Churning Affects Your Credit

There are a few ways that credit card churning affects your credit and most of them aren’t great. Let’s start with the good part. When you open multiple credit cards at once, you may notice a small hit to your credit score from the hard credit inquiries, but this is typically minimal. 

Once your new credit limits show on your credit report, you’ll see a few points added because you’ve increased your available credit, which lowers your credit utilization. You’ll lower your utilization again when you pay off your balances, which means another credit score increase.

Credit card churning often means spending to hit balances on multiple cards at once. This can damage any earlier improvement you noticed. The addition of the new credit accounts will also lower your average age of accounts, which contributes to 15% of your overall credit score. 

This also comes into play when you close those new accounts. As mentioned earlier, the confusion of managing multiple credit cards can also create missed payments. That affects the largest part of your credit score, which is your payment history (35%). 

How Banks Treat Credit Card Churning

Although churning has the potential to be lucrative, credit card companies have gotten wise to cardholders learning to game the system. As such, some credit card issuers have created intricate tracking systems and introduced (published or unpublished) rules on handling churners.

Banks are always in favor of long-term relationships, as opposed to enticing bonus hunters who are here today and gone in six months. It’s just good business sense. It’s not illegal to do, but it is frowned upon because it defeats the bank’s goal behind creating the promotion. 

Chase

Chase’s rule to discourage card churning is the 5/24 rule. It’s unpublished, but it prohibits customers who’ve opened more than five credit card accounts within 24 months from opening a new Chase credit card. This applies to cards from any credit card issuer.

American Express

American Express has a once per person, per lifetime rule for their credit card offers. This restricts consumers to only taking advantage of one welcome bonus within their lifetime. American Express Customers may also be denied if they have more than five credit cards.

Citibank

Citibank follows an 8/65/90 rule. This means you can only do one credit application every eight days with no more than two within 65 days. Business owners are limited to one business credit card application every 90 days.

Bank of America

Bank of America has a 2/3/4 rule for card churners. You can only be approved for two cards every rolling two months, three cards every rolling 12 months, and four cards within 24 months. Most of their cards also block new bonuses if you received one in the past 24 months.

Is Credit Card Churning Worth It?

Credit card churning has tons of success stories scattered throughout the internet. It promises to help you travel and dine on the credit card company’s dime. 

However, it comes at the expense of your relationship with banks, risking debt, and your credit score. If you’re able to exert excellent discipline and organization skills with your credit and spending then this might be worth it for you. 

If you have doubts in those areas, you may want to reconsider your quest for credit card bonuses. 

The post Credit Card Churning: The Rewards Hack That Banks Hate appeared first on Credit Strong.

An authorized user is an individual that can make purchases using your credit card account. However, unlike a joint account holder, they’re not legally responsible for paying back the debts that either of you incurs.

Notably, in addition to giving them access to your credit line, adding someone as an authorized user can help their credit. Here’s everything you should know about the process, including how it works, the risks, and the alternatives.

How Does Adding an Authorized User Help With Credit?

For people that manage their credit cards well, adding an authorized user to their account can help build the authorized user’s credit significantly. 

A credit score is essentially the numerical output of a proprietary formula. Adding someone as an authorized user can help their credit score by positively influencing several variables in that formula. For example:

• Payment history: Authorized users generally aren’t responsible for paying back the debts they incur, but they usually still get credit for it. As a result, making monthly payments on time for the shared account helps them build a positive payment history and improve their credit score.
• Amounts owed: Much like maintaining a positive payment history, authorized users will benefit from a low credit utilization on the accounts you share with them. If you can keep the amount you owe to less than 10% of the card’s total spending limit, it should help their credit.
• Length of credit history: When you add an authorized user to your credit account, the age on their credit report is the same as yours. For example, if you open an account in 2005 and add them in 2020, it’s as if they held it since 2005 too, and a longer credit history is always beneficial to their credit score.
• Credit mix: Last but not least, adding an authorized user to your account adds a revolving credit account to their credit report. Having a diverse mix of installment and revolving debts is beneficial to their credit score.

Fortunately, adding an authorized user to your account doesn’t require a credit check for either party. That means it can’t do any harm to the fifth and final factor in your credit scores, new credit activity.

All that said, adding an authorized user to your account is only an opportunity to build a good credit score. If you or the authorized user misuses the card, both of your credit scores can suffer.

Risks of Adding an Authorized User

When you add someone to your credit account, there are undeniable risks to you as the primary cardholder and the newly authorized user. Let’s look at the potential downsides for both parties, starting with the primary account holder.

First and foremost, there’s the risk that the authorized user could spend money that they’re not supposed to spend. After all, they can use your credit line as much as they want with no responsibility to pay whatever credit card debt they incur.

They could max out your credit card if they wanted to, and you’d still be the only party liable for the balance. Not only is that a financial risk, but it also represents a significant risk to your credit score.

The two most significant factors in your FICO score are your payment history and amounts owed. An authorized user has the power to negatively affect both by racking up balances and neglecting to pay them.

That’s why so much trust goes into adding someone to your account and why so many people only do it for their children. Even then, it’s common to refrain from giving them a copy of the card or even informing them.

Next, let’s discuss the risk to the authorized user. They don’t have any financial downside, but there’s no guarantee adding them to the account will improve their credit either.

If either of you makes a mistake with the shared account, it will typically hurt both of your scores. For example, missing one of your monthly payments or inflating your credit utilization will cost you both.

Because of these risks to both parties, it’s a good idea to sit down and make sure everyone is on the same page before adding anyone as an authorized user.

Just like you would with a joint credit card, confirm how much each person can spend and who’s responsible for paying what.

Can You Remove an Authorized User?

Fortunately, adding an authorized user to your account is never permanent. If you want to revoke their status, you always have the option to remove them from your account.

This method varies between credit card companies, so check your provider’s website to confirm the easiest way to do so.

For example, Chase lets you add authorized users online as long as you have their name, date of birth, and address, but you’ll have to call their customer service if you want to remove someone.

If you’re removing an authorized user because they’ve abused their privileges, you probably don’t care what it will do to their credit. However, if you’re thinking of doing so because your child has become independent, know that it could hurt their score.

When you remove an authorized user from your credit card, it can affect their credit in one of two ways. The credit card company may stop reporting the account’s activity, or its history could disappear from their report altogether.

Either one can have a negative impact on their score by weakening their payment history, increasing their credit utilization ratio, decreasing the age of their credit accounts, or reducing their positive credit history.

If you’re still on good terms with the person you have as an authorized user, consider checking in with them and discussing whether it’s a good time to remove them.

Why a Credit Builder Loan Is a Better Option

Adding someone as an authorized user is a great way to give them a quick boost to their credit, especially if they have a thin credit file or a bad credit score.

However, it’s no substitute for having them start a credit history of their own with something like a secured credit card or installment account.

In fact, if you’re thinking about adding an adult child to your best credit card as an authorized user to help them build good credit, they might be better off if you suggest a credit builder loan like Credit Strong’s instead.

Our credit builder loans are installment accounts that place the proceeds in a locked savings account upon approval. The borrower then makes monthly payments and steadily pays off their principal balance.

As they do, we report their payments to each major credit bureau. We’ll also give them regular score updates so they can be sure they’re building credit.

Once they pay off their loan in full, we release their funds, and they’ll finish the process with a higher score and a nice chunk of change. Consider suggesting it today!

FAQs

Will Adding My Child as an Authorized User Help His Credit?

Adding your child as an authorized user can definitely help their credit. However, it ultimately depends on the circumstances, including how you both use the account and the other items on their credit report.

In general, adding your child as an authorized user should benefit their credit as long as you make all your monthly payments on time and keep your balance on the account at a reasonable level relative to the account’s credit limit.

Those represent the two most significant factors in your credit scores. Namely, your payment history and amounts owed. Managing them both well is the best way to ensure the account helps your credit score and the authorized user’s.

Whether or not you make your payments on time is pretty black and white, but the maximum balance you can have on your credit account is somewhat gray. However, you should generally utilize no more than 10% of your credit for the best results.

That doesn’t mean you should let your balance carry over from month to month, though. It just means you shouldn’t let your balance exceed that level on the statement date. You should always pay off your balance in full before it’s due to avoid accruing interest.

How Much Will My Credit Score Go Up if I Become an Authorized User?

It’s impossible to say for sure how much becoming an authorized user will help your credit score since the answer can vary significantly depending on the circumstances.

However, you can guess the approximate effect by considering how the new account impacts the most significant factors that go into your credit score. For example:

• Payment history: Your payment history is worth 35% of your Fair Isaac Corporation (FICO) score, making it the most important variable. As long as you or the primary account holder make all the payments on time and in full, your credit score should go up significantly.
• Amounts owed: The amount you owe on your credit accounts is worth 30% of your FICO score and the second most important variable. The lower you can keep the balance on the card, the more your credit score should increase.
• Age of credit accounts: The length of your credit history is worth 15% of your credit score, and having older accounts is always better. If you add someone to your account that’s many years old, their credit score will go up more than it would if you had added them to one you had opened recently.

Note that these changes can help you assess the impact becoming an authorized user will have on your credit score, but the actual result also depends on your starting point.

For example, someone with a 600 credit score and a thin credit file will probably see a more significant boost from being an authorized user than someone with a 700 credit score and a few other credit accounts on their report.

Will My Credit Score Go Down if I Add an Authorized User?

Adding someone to your credit card as an authorized user never impacts your credit score. Neither you nor the authorized user needs to undergo a credit check to put them on your account.

However, adding an authorized user does expose your credit score to some risk. For example, if they abuse their privileges by spending more than they’re supposed to, your credit score could go down.

That would inflate your credit utilization ratio and amounts owed, which could cause you to miss one or more of your monthly payments.

As a result, you should only add someone as an authorized user to your credit card if you trust them. Alternatively, if your only motive for adding them is to build their credit score, you could do so without giving them physical access to your credit card.

Your responsible use of the account would still benefit them, but there would be no risk that they could overspend or otherwise misuse the credit line.

Does Taking Someone Off as an Authorized User Hurt Their Credit?

Taking someone off the authorized user account can hurt their credit in some situations. However, it’s also possible that removing them could be beneficial or neutral to their score.

Ultimately, it depends on the circumstances, including how well you’ve both managed the account in question and what else is on their credit report. For example, removing them might hurt their credit in the following circumstances:

• You’ve made all payments for the account on time, and they don’t have any other payment history.
• Without the credit card on their credit report, their overall credit utilization ratio increases significantly.
• The account was the oldest credit card on their credit report.

Naturally, in the opposite kinds of situations, removing the account could benefit their credit. For example, removing an account with a recent late payment could actually improve their score.

Because it depends so significantly on the circumstances, it’s a good idea to discuss with your authorized user whether or not it’s worth removing them before contacting your credit card issuer.

After all, if they’re not actively using your credit card, it doesn’t cost anything to leave them on the account.

The post Will Adding an Authorized User Help Their Credit? appeared first on Credit Strong.

Credit cards are one of the most popular payment methods for their convenience, interest-free grace period, and cashback rewards. However, using them means taking on credit card debt, and how you pay it off significantly impacts your credit score.

Let’s explore the various approaches to repaying your card balances and determine the best way to improve your credit score.

Credit Score Factors To Keep in Mind

There are two primary credit score factors to pay attention to when managing your credit cards. Let’s discuss what they are and their implications when you’re trying to build credit.

Payment History

Your payment history is a track record of your previous monthly debt obligations and whether or not you’ve completed them on time. It’s worth 35% of your score, which makes it the most impactful factor in the FICO algorithm.

To optimize your credit, you must make the minimum monthly payment on all your cards each month. Missing even a single one can harm your score significantly and stay on your credit report for seven years.

However, that doesn’t make it wise to avoid using your credit cards altogether. It may eliminate the risk of late payment, but it also prevents you from building a positive history, which is essential for improving your credit scores.

Credit Utilization

Your credit utilization equals your credit card balance divided by your credit limit. It falls under the amounts owed scoring factor, which is worth 30% of your FICO score and the second most impactful variable in the formula.

Generally, a lower credit utilization ratio makes you look like a safer borrowing prospect to a lender or credit card issuer and increases your score. It indicates that you’re using your credit cards responsibly and aren’t at risk of overextending financially.

Aim for a utilization ratio between 1% and 10% for the best results. Once again, you want to show that you’re keeping your balances low but still actively using the account. A 0% utilization rate is better than overspending, but it’s not optimal.

How To Pay Off Your Credit Cards

If you have outstanding balances across multiple credit cards that you can’t repay at once, there are several approaches to paying them off over time. Here are the most popular options to consider.

The Avalanche Method

The avalanche method involves making your minimum credit card payments on time, then putting all spare cash flow toward the account with the highest interest rate. Once you pay off the first, continue down the line until you’re debt free.

For example, say you have three credit cards with the following balances, interest rates, and minimum monthly payments:

• Card A: $2,800 at 14% with a $60 payment
• Card B: $4,200 at 23% with a $100 payment
• Card C: $5,600 at 15% with a $125 payment

Assuming you have $500 in monthly cash flow for your debt payments, you’d have $215 left after fulfilling your minimum obligations.

If you favor the avalanche method, you’d put that remainder toward Card B until you paid it off in 15 months. Once you’ve eliminated that balance, you’d pay off Card C next, then finish with Card A.

Because it prioritizes the account with the highest interest rate, the avalanche method minimizes your time in debt and interest costs. It also improves your credit score the fastest, all things being equal.

In this case, it would get you out of debt in two years and six months, during which you’d accrue $2,874 in interest.

The Snowball Method

The snowball method also involves making your minimum monthly payments and putting all spare cash flow toward one account until it’s gone, then moving down the line until you’re out of debt. However, it prioritizes the account with the lowest balance.

For example, say you have the same credit cards from the previous section, which include:

• Card A: $2,800 at 14% with a $60 payment
• Card B: $4,200 at 23% with a $100 payment
• Card C: $5,600 at 15% with a $125 payment

Assuming you still only have $500 per month for your debts, you’d put the extra $215 toward Card A first. It would take you ten months to pay off the balance, after which you’d focus on Card B and then Card C.

Because it prioritizes the account with the lowest outstanding balance, the snowball method lets you pay off your first card sooner than the avalanche method. However, it also means more time in debt, higher financing costs, and slower score improvement.

In this case, you’d eliminate your first credit card five months faster, but you’d stay in debt for a year longer and pay an extra $348 in interest.

Debt Consolidation

Debt consolidation is an entirely different approach to paying off credit card debts that involves taking out a new credit account. You use the proceeds to pay off your existing balances, then repay the new debt in place of the old ones.

Debt consolidation makes the most sense when you can qualify for a new account with more favorable terms. Typically, that means reducing the following:

• Overall interest rate
• Total monthly payment
• Time to debt freedom
• Total financing costs

Consumers usually use a personal loan or a 0% interest balance transfer card to pursue these benefits. However, it’s not always possible to accomplish them all at once. You may need to sacrifice in some areas to get the relief you need in others.

In addition, you typically need a good to excellent credit history to qualify for a low-interest personal loan or a 0% interest balance transfer card.

For example, say you have the same credit cards from above, which have a total balance of $12,600, a weighted average interest rate of 17.4%, and a combined $285 minimum monthly payment.

Assuming you can only afford the minimum payments, it would take you seven years and three months to become debt free. During that time, you’d incur $8,339 in interest.

However, you have a good credit score and refinance into a $12,600 personal loan. It has a lower interest rate of 8%, a five-year loan term, and a $255 minimum monthly payment.

You’d reduce your minimum payment by $30, get out of debt two years earlier, and save a whopping $5,610 in interest.

Does Paying Slowly Help Your Credit?

Generally, the more timely payments you make, the better your credit score. As a result, you might think paying your credit card debts back slowly is to your benefit when building credit, but that’s not the case.

The payment history factor only considers whether you make your full monthly payments on time. The size of those payments doesn’t affect it, nor does the size of the balance you’re repaying.

As a result, paying back a large credit card debt slowly doesn’t benefit your payment history. However, it negatively impacts your amounts owed and artificially increases your credit utilization.

Remember, it’s best to keep your balances between 1% and 10% of your available credit limit to optimize your credit score. If you can afford to pay off your debts every month and keep them within that range, then your score will only benefit.

Even if maintaining a higher credit card balance did improve your score, the interest rates on credit cards are too high to make it worth it. It’s always best to pay off your statement balance and avoid accruing charges.

Why You Want To Avoid the Minimum Payment Trap

The best way to use a credit card to build credit is to spend within your means and pay off your statement balance each month. That way, you’ll optimize your payment history and credit utilization while avoiding interest charges.

The worst mistake you can make is to overspend and get stuck making minimum payments toward your debts.

Every credit card company must set minimum payments high enough to cover interest costs, but they often barely clear that requirement. As a result, paying them can trap you in debt indefinitely and ruin your finances.

Fortunately, you can make much faster progress by incrementally increasing your monthly payments.

For example, say you have a $4,000 balance on a credit card with an average interest rate of 16%. Its minimum payment equals the monthly interest charge plus 1% of the outstanding balance, which equals $93.

Assuming you made no additional purchases on the card, it would take you 20 years and six months to pay off that balance by making minimum payments. During that time, you’d incur $4,793 in interest.

However, if you increased your monthly payment to $150, which is only $57 more, you’d get out of debt in 34 months and pay just $976 in interest, which is a massive difference.

Which Strategy Is the Best for You?

Each debt repayment strategy has merit, so the best depends on your circumstances and preferences. Let’s look at each one to help you decide which to choose.

If you have the credit score to qualify for debt consolidation, it’s worth investigating first. Refinancing your credit cards into a personal loan can significantly improve your terms.

Consolidating into a 0% balance transfer card can also be beneficial, but it’s riskier. You’ll forestall all interest charges for about 18 months, but your interest rate will rise to typical credit card levels afterward if you don’t pay off your balance.

However, consolidation has a complicated effect on your credit. You’ll lose points upfront for incurring a hard credit check, lowering the age of your accounts, and likely raising your credit utilization.

That said, the financial benefits are often worth it, and your score will be better off in the long term if consolidation saves you from missing monthly payments.

Meanwhile, if you have a bad credit score and can’t qualify for debt consolidation, the avalanche method is the most efficient. Targeting the card with the highest interest rate minimizes your financing costs and time in debt, improving your score the fastest.

However, the debt snowball method lets you pay off your first account faster. That early reward can help you build momentum and incentivize you to keep going.

If you need the additional motivation that paying off an account provides to stay disciplined with your payments, then the snowball method may be superior.

CreditStrong’s Revolv account can help you improve your score without the financial risk that comes with credit cards, and there’s no credit check when you apply. Give it a try today!

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If you’re looking for a new credit card for your small business, you technically don’t have to get a business credit card, especially if you just want to separate your personal and business expenses.

But the benefits that come with small business credit cards should make any business owner reconsider using a personal card to help run their business. 

Understanding the differences between personal and business credit cards can help you determine which is the right fit for your company card.

Differences Between a Business Credit Card and a Personal Credit Card:

On the outside, business credit cards may seem indistinguishable from personal credit cards. But the differences in how the two function and how they can help your small business are big enough that you could miss out on a lot if you’re not using a business credit card.

Here are some of the major differences you’ll find between the two options.

A Business Credit Card Application Needs Details About Your Business

When you apply for a business credit card, the application will typically require information about your business and you as the business owner.

For example, if your company has an employer identification number (EIN), you’ll want to provide that on the application. You may also be asked to provide some or all of the following information:

• Business name
• Business address
• Annual revenues
• Expected monthly expenses
• Number of employees
• Names of each business owner, along with their share of ownership, Social Security numbers, and address

Business Credit Cards Usually Have Higher Limits

When you’re just starting out, you may not have a lot of business expenses. But as your business grows, a personal credit card likely won’t give you the credit limit you need to keep up with your purchases.

What’s more, if you’re constantly bumping into your credit limit on a personal credit card, it could have a seriously negative impact on your personal credit score. 

Whether you already have a lot of expenses or you anticipate your expenses growing over time, you’re likely better off with a business credit card.

Business Credit Cards Can Affect Both Your Personal and Business Credit Scores

One of the biggest benefits of using a small business credit card is that it can help you establish your business credit history, as long as you have an EIN and add it to your application when you first sign up. 

Building your business credit score early on can make it easier for you to qualify for business financing as your company grows, and a personal credit card can’t help you do that.

That said, business credit cards can also impact your personal credit score. While some major business card issuers don’t report any activity to the consumer credit bureaus, you can generally expect a hard inquiry on your personal credit reports when you submit an application.

In most cases where business credit card issuers report to the consumer credit bureaus, it’s when you’ve missed a payment, or you’re seriously delinquent on your account.

However, some card issuers, including Discover and Capital One (on most cards), report all of your account activity to the personal credit bureaus. 

Depending on how you use the card, it could end up hurting your personal credit score, so it’s important to consider credit reporting as a major factor as you shop around for the right company credit card.

Small Business Credit Card Benefits Are Tailored to Business Needs

Many business credit cards offer rewards and features that are better designed to suit a small business owner’s needs compared to a personal credit card.

For example, instead of getting bonus rewards on things like groceries and restaurants, you might get a card that offers extra cash back, points, or miles on things like advertising, shipping, and office supplies. 

Some business credit cards also offer bigger sign-up bonuses. Though they also typically have a higher spending requirement to earn that bonus — which small businesses will have an easier time accomplishing.

Finally, many small business credit cards come with ancillary benefits that can be beneficial for your business. For example, you may get more detailed expense reports and the ability to seamlessly sync your account to a third-party accounting software like Quickbooks.

You can also typically get free employee cards tied to the account, with the ability to set limits on how much your employees can spend. 

One area where personal credit cards do better is with 0% APR promotions. Although there’s a handful of business credit cards that offer introductory 0% APR promotions, they aren’t as plentiful as with personal credit cards.

As you look for the right small business credit card, consider the rewards program and business-specific card features to determine which card will give you the most value.

No Consumer Protection Policies on Business Credit Cards

One area where personal credit cards have an advantage is in the consumer protections that they get. The Credit CARD Act of 2009 provided a major overhaul in how credit card issuers are allowed to market credit cards, change interest rates and fees, and more.

Unfortunately, though, those protections only apply to personal credit cards. 

For example, in cases where a credit card charges a penalty APR, the card issuer can’t charge the higher rate until you’ve been late at least 60 days and the issuer sent you a notice 45 days in advance of the increase. 

With a business credit card, missing just one payment could trigger the penalty APR. 

The good news is that some major small business credit card issuers have matched some or all of their terms to provide the same protections that consumers get through the CARD Act. 

But it’s important to read the fine print on any credit card you’re thinking about getting to get an understanding of how you’ll be protected.

Most Small Business Owners Need to Use Personal Credit to Get a Business Credit Card

Some small business owners may find business credit cards appealing because they want to put all of their debt under the business instead of their own.

Before you continue with that reasoning, though, it’s important to note that most small business credit cards require a personal guarantee when you apply. This means that if your company can’t pay the monthly bill, you’re responsible for paying it with your personal assets.

It also means that you’ll need to provide your Social Security number on the application, and there will be a hard inquiry on your personal credit reports when you submit your application.

And, as previously mentioned, the card issuer may report other information about the account to the consumer credit bureaus, which can impact your personal credit score.

If You Build Business Credit, You Can Qualify for Business Credit Cards That Don’t Impact Personal Credit

If your company is large enough and you’ve established a solid business credit score, you may be able to get a corporate credit card that won’t impact your personal credit.

Corporate cards are typically reserved for companies that generate several millions of dollars in revenue each year. Because they don’t require a personal guarantee or credit check, they also typically require a solid business credit history to get approved.

Here’s the thing, though: You can’t build a business credit score with a personal credit card, so even if you want to use one for other reasons, building your business credit history is a compelling reason to go for a business credit card.

It’s also a good idea to use other forms of business financing to supplement your progress on your business credit cards. For example, the Credit Strong Business credit-builder account can provide a long-term benefit to your credit history.

When you open the account, the $10,000 loan amount will be placed in a savings account and locked. You’ll then make low monthly payments over a 60- or 120-month period. Once you’ve paid the loan in full, you’ll get the full loan funds, which you can use to invest in your business.

Can I Use a Personal Credit Card for Business?

You can absolutely use a personal credit card to cover your everyday business expenses. 

In cases where your business is still new, and you simply want to separate your personal and business expenses, using a personal card for business purposes only can be a great way to establish that separation.

But because personal credit cards have lower credit limits, don’t build business credit history, and don’t have rewards and features that are tailored to the needs of a business owner, they’re generally not recommended for long-term use.

That doesn’t mean you need to open a business credit card now but take the time to think about the needs of your business and whether a business card might be a better fit for you and your company.

Is it Worth Having a Business Credit Card?

If you’re serious about building your business, having a business credit card can have a significantly positive impact on your company’s growth.

Here’s a quick recap of how a business credit card can help you:

• Provides working capital: A business credit card can help with cash flow management and give you more time to pay off your purchases.
  
  And as long as you pay your bill on time and in full every month, you’ll never have to pay interest. Compared to a personal credit card, you’ll typically get a higher credit limit, which means more spending power.
  
• Builds business credit history: As you use your account responsibly and pay your bill on time every month, it can help you establish a business credit history, which will be crucial later on when you have more extensive capital needs.
  
• May not impact personal credit: Depending on which card issuer you apply with, your business credit card may not impact your personal credit score at all. Just be sure you research your options to find one that doesn’t put your personal credit in jeopardy.
  
• Offers business-specific features: If your business spends a lot in certain areas, you may be able to find a business credit card that offers bonus rewards on those purchases.
  
  You’ll also typically get extra perks that are better suited to the needs of a business than a regular person.
  
• Better separates business and personal expenses: You can use a personal credit card to separate your business and personal affairs.
  
  But it might be easier to do it with a business credit card when you know that card is specifically and legally tied to your company.

If you’re thinking about getting a new credit card for your business, consider getting a small business credit card instead of a personal one. Be sure to take your time to research your options before you apply, though. 

While personal credit cards are more plentiful than business ones, there are still a lot of business card options available, and it’s important to find the one that fits best with your business spending and needs.

The post Business Credit Cards vs. Personal Credit Cards: What’s the Difference? appeared first on Credit Strong.

You’ve worked hard at building your credit and you now have a good credit score that can be used for applying and getting approved for the credit card you’ve always wanted. Congrats!

But a few weeks after you activate and begin using the new card, you may notice that your credit score takes a dip. 

You might think: “This doesn’t make sense, I have more credit now, shouldn’t my score go up? Why is it going down instead?”

While getting a new credit card can be beneficial to your overall credit, the positive influence on your credit score will be long-term. 

In the short term, the new card can negatively impact your FICO credit score, thanks to decreasing your average account age and increasing your number of hard pulls. 

As frustrating as this is, so long as you maintain on-time monthly payments for the new credit card, the dip to your credit score will only be temporary. 

How Getting a New Credit Card Impacts Your Credit Score

Opening a new credit card, or any other type of credit line, will have an impact on your FICO score. These changes can be both positive and negative. 

Changes to your credit score won’t happen overnight, it will take weeks or even months for you to start seeing the changes. 

The initial changes you will likely see are the negative ones or the ones that have the power to decrease your FICO score. If applying for the card resulted in a hard pull, that will be the first negative impact on your score. 

The average age of your credit will be the next area to take a hit. The degree of impact here will depend on how long you have had your existing credit accounts open. 

If you specifically opened the new card to consolidate debt or to make a large purchase, then your credit utilization could take a big hit as well. 

While this sounds discouraging, so long as you maintain a good payment history, the positive influences to your credit report, like an increase to your overall credit limit and diversification of your credit types, could see your score increase in the long run. 

Hard Pull Impacts – Negative

Unless you are opening a secured credit card, receiving a hard pull on your credit is nearly impossible to avoid. 

A hard pull is when the credit card company or card issuer performs a credit check. They need to verify that you are who you say you are and determine if you have a good credit score or a bad credit score, which can affect your approval and/or interest rate. 

There is usually a disclaimer on the credit card application that informs you that the lender will pull your credit report and that this could impact your score. 

The reason why a hard pull can hurt your credit score is that a hard pull signifies you are looking for credit. One or two hard pulls won’t damage your score too much, but a large number of hard pulls over a short amount of time will. 

Too many hard pulls or credit inquiries, signal that you could be strapped for cash and living on your credit lines. 

The good news is that your FICO score is made up of several different factors, and credit inquiries make up a pretty small portion of your score. 

Lower Average Age of Accounts – Negative

The average age of your accounts or length of credit history has a slightly bigger impact on the FICO credit scoring system. 

There are two parts to this portion of your credit score. 

The first is the age of your oldest account. The longer you have had a credit account, the better this is for your score. Unless the new credit card you are opening is your first credit line, then this factor will not be impacted. 

The second part is a calculation of the average age of all of your accounts (both open and closed). Essentially, you add up all the months/years you’ve had each account open and divide that by the number of accounts. The higher this number is, the better your score. 

So when you open a new account, this drops your average account age. Depending on your existing credit history, this could result in a drastic dip in your credit score. 

Example Calculation 

As you can see in the above calculation, if you have a small number of existing accounts which are several years old, opening a new card will be a huge hit to your average age of account, which will translate to a significant dip in your credit score. 

If you have multiple credit cards and other accounts, or your accounts are younger, then the dip to your average account age and credit score will not be as bad. 

Increase in Credit Utilization – Negative

What was your reason for opening the new credit card? 

If it was to make a large purchase, then your credit utilization could take a hit. And credit utilization makes up a significant portion of your credit score. 

Credit utilization is calculated by adding up the total balance of debt on all of your revolving credit accounts and dividing that number by the total credit limits on those accounts. 

For example, let’s say that you had 3 credit cards, each with a small balance being reported. 

Credit Card 1: $1000 credit limit with $200 balance.

Credit Card 2: $2500 credit limit with $350 balance. 

Credit Card 3: $3000 credit limit with $475 balance. 

Your credit utilization ratio would be: $1025/$6500 = 15.8%

The lower the credit utilization percentage, the higher your score will be. 

So, if you put a large balance on your new credit card, this will increase your overall credit utilization rate which will, in turn, drop your credit score. Not to mention, it will reduce your available credit and put you further in debt.

Increase in Overall Credit Limit – Positive

If your choice in opening a new credit card was not to make a large purchase, this is good news for your credit score. Once the new credit limit begins appearing on your credit report, this could decrease your credit utilization ratio. 

If we keep the same credit card balances and limits as the example above and add a 4th credit card (your new one) with a $4000 credit limit and a $100 balance, then the credit utilization ratio decreases to 10.7% or $1125/$10,500. 

The positive aspect of increasing your overall credit limit only works if you keep utilization low. If you maintain a high balance or debt amount on your new card, then your increase in credit limit won’t help your score as much. 

Credit Diversity – Positive

If this new card is your first credit card, then this is great news for your credit. 

One aspect of the FICO credit scoring model is your mix of credit or credit diversity. Basically, this is an overview of what types of credit lines you have open. 

Credit types include installment loans (i.e. a personal loan like a credit builder loan), credit cards, retail accounts, and loans from a mortgage lender. 

While you don’t need to have one of every credit type to max out your score, you do need to have more than one type of credit line. 

So, if all you previously had was a student loan or an auto loan, then adding a credit card to your report should boost your score. Even if you already have a credit card, opening a new one could still boost the credit mix portion of your score if the number of accounts you have is small. 

Unlike credit utilization, debt is a good thing when it comes to credit mix. 

A situation where the credit mix part of your score could be negatively impacted would be if this is your 6th credit card and you have no other types of credit on your credit report. 

If this is the case, then you should look at accounts that build credit and/or consider ways on how to build credit without a credit card. 

How Long After Getting a Credit Card Will My Credit Score Go Up?

If your score went down after you opened a new credit card, then you may be wondering when it will go up again. The exact answer will depend on the makeup of your unique credit report. 

The credit inquiry part of your score may take a while as credit inquiries stay on your report for two years before falling off. That said, they are no longer calculated in your score after the 1 year mark. 

Likewise, improving your average age of account is simply a waiting game. Each month, your average age of account will go up and your score along with it. Just how fast this happens will depend on the number of accounts that you have and their ages. 

How fast your credit utilization will improve will depend on how fast you can pay down your debt. If the ding to your utilization was because you transferred balances from other cards, then it should only take a month or so for the reporting to catch up and your score to improve. 

You also need to maintain the other key areas affecting your credit report, which include sustaining a good payment history, not opening any new accounts, and not closing existing accounts. 

The majority of people should see a recovery in their score within a few months to a year. Even if it takes a while, your score will eventually recover, and you could even hit the excellent credit threshold. 

The Importance of Checking Your Credit 

How do you know if your credit is improving or not? You need to check your credit report to find out. Once a year, or each time you have a credit application rejected, you can obtain a free credit report from each credit reporting agency (credit bureaus). 

You’ll want to not only make sure that your new account is reporting, but you’ll also want to check the items on your existing credit history. Also, check the payment history to make sure there aren’t any missed payments that you are unaware of. 

Next, check your debt or credit utilization to ensure everything is reporting correctly. If you’ve paid off a debt, but a balance is still showing on your report, you’ll need to contact the lender. 

If you find errors on your report and suspect fraud, you can set up a credit freeze until the issue gets resolved. Even if the errors you find are minor, it is important to get them fixed as they could mean the difference between a poor credit score and a good credit score. 

For more information, check out this article on how to correct credit card errors.

The post Why Is My Credit Score Low After Getting a Credit Card? appeared first on Credit Strong.

Credit cards are one of the most popular payment methods for their convenience, interest-free grace period, and cashback rewards. However, using them means taking on credit card debt, and how you pay it off significantly impacts your credit score.

Let’s explore the various approaches to repaying your card balances and determine the best way to improve your credit score.

Credit Score Factors To Keep in Mind

There are two primary credit score factors to pay attention to when managing your credit cards. Let’s discuss what they are and their implications when you’re trying to build credit.

Payment History

Your payment history is a track record of your previous monthly debt obligations and whether or not you’ve completed them on time. It’s worth 35% of your score, which makes it the most impactful factor in the FICO algorithm.

To optimize your credit, you must make the minimum monthly payment on all your cards each month. Missing even a single one can harm your score significantly and stay on your credit report for seven years.

However, that doesn’t make it wise to avoid using your credit cards altogether. It may eliminate the risk of late payment, but it also prevents you from building a positive history, which is essential for improving your credit scores.

Credit Utilization

Your credit utilization equals your credit card balance divided by your credit limit. It falls under the amounts owed scoring factor, which is worth 30% of your FICO score and the second most impactful variable in the formula.

Generally, a lower credit utilization ratio makes you look like a safer borrowing prospect to a lender or credit card issuer and increases your score. It indicates that you’re using your credit cards responsibly and aren’t at risk of overextending financially.

Aim for a utilization ratio between 1% and 10% for the best results. Once again, you want to show that you’re keeping your balances low but still actively using the account. A 0% utilization rate is better than overspending, but it’s not optimal.

How To Pay Off Your Credit Cards

If you have outstanding balances across multiple credit cards that you can’t repay at once, there are several approaches to paying them off over time. Here are the most popular options to consider.

The Avalanche Method

The avalanche method involves making your minimum credit card payments on time, then putting all spare cash flow toward the account with the highest interest rate. Once you pay off the first, continue down the line until you’re debt free.

For example, say you have three credit cards with the following balances, interest rates, and minimum monthly payments:

• Card A: $2,800 at 14% with a $60 payment
• Card B: $4,200 at 23% with a $100 payment
• Card C: $5,600 at 15% with a $125 payment

Assuming you have $500 in monthly cash flow for your debt payments, you’d have $215 left after fulfilling your minimum obligations.

If you favor the avalanche method, you’d put that remainder toward Card B until you paid it off in 15 months. Once you’ve eliminated that balance, you’d pay off Card C next, then finish with Card A.

Because it prioritizes the account with the highest interest rate, the avalanche method minimizes your time in debt and interest costs. It also improves your credit score the fastest, all things being equal.

In this case, it would get you out of debt in two years and six months, during which you’d accrue $2,874 in interest.

The Snowball Method

The snowball method also involves making your minimum monthly payments and putting all spare cash flow toward one account until it’s gone, then moving down the line until you’re out of debt. However, it prioritizes the account with the lowest balance.

For example, say you have the same credit cards from the previous section, which include:

• Card A: $2,800 at 14% with a $60 payment
• Card B: $4,200 at 23% with a $100 payment
• Card C: $5,600 at 15% with a $125 payment

Assuming you still only have $500 per month for your debts, you’d put the extra $215 toward Card A first. It would take you ten months to pay off the balance, after which you’d focus on Card B and then Card C.

Because it prioritizes the account with the lowest outstanding balance, the snowball method lets you pay off your first card sooner than the avalanche method. However, it also means more time in debt, higher financing costs, and slower score improvement.

In this case, you’d eliminate your first credit card five months faster, but you’d stay in debt for a year longer and pay an extra $348 in interest.

Debt Consolidation

Debt consolidation is an entirely different approach to paying off credit card debts that involves taking out a new credit account. You use the proceeds to pay off your existing balances, then repay the new debt in place of the old ones.

Debt consolidation makes the most sense when you can qualify for a new account with more favorable terms. Typically, that means reducing the following:

• Overall interest rate
• Total monthly payment
• Time to debt freedom
• Total financing costs

Consumers usually use a personal loan or a 0% interest balance transfer card to pursue these benefits. However, it’s not always possible to accomplish them all at once. You may need to sacrifice in some areas to get the relief you need in others.

In addition, you typically need a good to excellent credit history to qualify for a low-interest personal loan or a 0% interest balance transfer card.

For example, say you have the same credit cards from above, which have a total balance of $12,600, a weighted average interest rate of 17.4%, and a combined $285 minimum monthly payment.

Assuming you can only afford the minimum payments, it would take you seven years and three months to become debt free. During that time, you’d incur $8,339 in interest.

However, you have a good credit score and refinance into a $12,600 personal loan. It has a lower interest rate of 8%, a five-year loan term, and a $255 minimum monthly payment.

You’d reduce your minimum payment by $30, get out of debt two years earlier, and save a whopping $5,610 in interest.

Does Paying Slowly Help Your Credit?

Generally, the more timely payments you make, the better your credit score. As a result, you might think paying your credit card debts back slowly is to your benefit when building credit, but that’s not the case.

The payment history factor only considers whether you make your full monthly payments on time. The size of those payments doesn’t affect it, nor does the size of the balance you’re repaying.

As a result, paying back a large credit card debt slowly doesn’t benefit your payment history. However, it negatively impacts your amounts owed and artificially increases your credit utilization.

Remember, it’s best to keep your balances between 1% and 10% of your available credit limit to optimize your credit score. If you can afford to pay off your debts every month and keep them within that range, then your score will only benefit.

Even if maintaining a higher credit card balance did improve your score, the interest rates on credit cards are too high to make it worth it. It’s always best to pay off your statement balance and avoid accruing charges.

Why You Want To Avoid the Minimum Payment Trap

The best way to use a credit card to build credit is to spend within your means and pay off your statement balance each month. That way, you’ll optimize your payment history and credit utilization while avoiding interest charges.

The worst mistake you can make is to overspend and get stuck making minimum payments toward your debts.

Every credit card company must set minimum payments high enough to cover interest costs, but they often barely clear that requirement. As a result, paying them can trap you in debt indefinitely and ruin your finances.

Fortunately, you can make much faster progress by incrementally increasing your monthly payments.

For example, say you have a $4,000 balance on a credit card with an average interest rate of 16%. Its minimum payment equals the monthly interest charge plus 1% of the outstanding balance, which equals $93.

Assuming you made no additional purchases on the card, it would take you 20 years and six months to pay off that balance by making minimum payments. During that time, you’d incur $4,793 in interest.

However, if you increased your monthly payment to $150, which is only $57 more, you’d get out of debt in 34 months and pay just $976 in interest, which is a massive difference.

Which Strategy Is the Best for You?

Each debt repayment strategy has merit, so the best depends on your circumstances and preferences. Let’s look at each one to help you decide which to choose.

If you have the credit score to qualify for debt consolidation, it’s worth investigating first. Refinancing your credit cards into a personal loan can significantly improve your terms.

Consolidating into a 0% balance transfer card can also be beneficial, but it’s riskier. You’ll forestall all interest charges for about 18 months, but your interest rate will rise to typical credit card levels afterward if you don’t pay off your balance.

However, consolidation has a complicated effect on your credit. You’ll lose points upfront for incurring a hard credit check, lowering the age of your accounts, and likely raising your credit utilization.

That said, the financial benefits are often worth it, and your score will be better off in the long term if consolidation saves you from missing monthly payments.

Meanwhile, if you have a bad credit score and can’t qualify for debt consolidation, the avalanche method is the most efficient. Targeting the card with the highest interest rate minimizes your financing costs and time in debt, improving your score the fastest.

However, the debt snowball method lets you pay off your first account faster. That early reward can help you build momentum and incentivize you to keep going.

If you need the additional motivation that paying off an account provides to stay disciplined with your payments, then the snowball method may be superior.

CreditStrong’s Revolv account can help you improve your score without the financial risk that comes with credit cards, and there’s no credit check when you apply. Give it a try today!

The post The Best Way to Pay Off Credit Cards to Improve Your Credit Score appeared first on Credit Strong.

In a business’s early years, expenses are often high and revenues low, which makes external funding necessary. Unfortunately, it can be frustratingly difficult to obtain.

As a result, finding creative ways to qualify for financing is often one of the most significant challenges for young startups and small businesses. 

Credit card stacking is an innovative approach you can substitute for a business line of credit. Here’s what you should know about it, including how it works, the pros and cons, and whether or not it’s worth it.

What Is Credit Card Stacking? How Does It Work?

Credit card stacking is an alternative financing strategy for business owners that might not qualify for a line of credit. It involves applying for multiple credit cards at once then using the ones that approve you as one big revolving credit line. 

Unfortunately, traditional business lines of credit are often hard to get. Most providers have eligibility requirements that can make it difficult for many businesses to qualify.

They include criteria that you can’t change quickly or easily, such as your time in business or gross annual revenue. Meanwhile, it’s possible to qualify for most business credit cards with nothing but a high personal credit score.

Credit cards generally have lower credit limits than business lines of credit, but stacking a few of them together can make up for the difference.

For example, say you own a startup that’s been in business for four months. You bring in $40,000 in revenue during that time, but customers often pay slowly. To help smooth out your cash flows, you want a revolving line of credit for $100,000.

Unfortunately, every bank you talk to requires that you be in business for at least two years to get a line of credit. Even the most flexible online lender you can find requires that you be in business for six months.

You can’t wait to get funding, so you apply to six different credit cards using your personal credit score. Two of them deny you, but you get approval for four, and each one has a $25,000 credit limit.

With all four credit cards stacked together, you have the equivalent of an unsecured revolving line of credit for $100,000. Note that you can do the same thing with multiple loans, which is called loan stacking.

Pros of Credit Card Stacking

Getting a revolving line of credit is difficult to do during your first few years in business. The main benefit of credit card stacking is that it offers many of the same financial advantages as a line of credit, but it’s much more attainable.

Banks generally won’t be interested in working with you if your business isn’t at least two years old and bringing in $100,000 in annual revenue. Online lenders are less strict, but they still typically want at least one year in business and $50,000 in revenue.

However, you can qualify for business credit cards without meeting those requirements, as long as you have a good enough personal credit score. When you stack all your cards together, you can use them a lot like you would a line of credit.

That can be incredibly useful for a business, especially a young one that doesn’t have a significant cash reserve or struggles with cash flow. You’ll always have credit available to cover your expenses when you couldn’t otherwise.

For example, that could be when:

• You charge customers on a net-30 or net-60 basis, so you often have to wait weeks or months to get paid.
• You have a seasonal business with revenues that are inconsistent throughout the year.

In addition, there are several advantages to getting your revolving debt from credit cards rather than a business line of credit. For example, it usually takes less time and effort to apply for a personal or business card than a business line of credit.

During a line of credit application, you usually need to provide documentation that you wouldn’t have to share to get a credit card, such as previous tax returns and financial statements.

Credit cards also have a grace period of about a month during which you won’t accrue interest on your purchases, as long as you pay off your balances before it ends.

Lastly, you can benefit from credit card rewards like cash back on eligible purchases or a one-time statement credit. In addition, you may find cards that offer 0% interest for the first six to 18 months.

Cons of Credit Card Stacking

Credit card stacking sounds like an ideal workaround for young businesses that need revolving credit, but there are significant drawbacks to consider.

First, submitting multiple credit card applications at once is bad for your credit score. You’ll likely apply for a mix of business and personal credit cards, but all of them will show up as hard inquiries on your personal credit reports.

A credit card issuer might not report your activity on a business credit card to the consumer credit bureaus, but they’ll still check your personal credit when you apply, which will count against your score.

There’s no rate shopping exclusion for credit cards either, so applying for them all at once won’t reduce the number of inquiries you incur.

Second, it can be a much more expensive form of borrowing since credit cards have a higher interest rate than lines of credit. You may also end up with several cards that charge an annual fee.

The third drawback to credit card stacking is that you have to manage multiple accounts instead of one. They’ll probably have different due dates, interest rates, and cashback reward rates.

That means you’ll have to be a lot more intentional about where you spend each card and when you pay off your balances. If you had a single line of credit, it’d be a lot less complicated.

It also increases the chances that you’ll accidentally miss one of your payments, which can incur unnecessary interest charges and damage your personal and business credit scores.

Business credit cards that don’t typically report to consumer credit bureaus often will if you miss a payment, so don’t assume your personal credit is safe, even if you only use business accounts.

Finally, while it’s easier to qualify for credit cards than a business line of credit, you’ll still need to have a good credit score to pull it off. If your FICO score is less than 680, you’ll probably struggle to get enough cards for a successful stack.

Is It Worth It?

Most financing strategies have their place, and credit card stacking isn’t any different. Ultimately, whether or not it’s worth it for you depends on your needs, circumstances, and ability to use your cards safely.

Here are some questions you can ask yourself about your business to determine whether the credit card stacking strategy is worth it for you.

First, do you need revolving credit or installment debt? If you need to fund a significant, one-time purchase, you’re better off with a business loan. Credit cards won’t be a viable substitute.

You might be able to qualify for some cards that offer 0% interest for a limited time, but that’ll expire at some point, and you’ll be stuck with high-interest credit card debt.

Second, can you afford to wait? Credit card stacking is a substitute for a revolving business line of credit, but it’s not a perfect one. You’d probably be better off with a legitimate line of credit if your business can survive until you can get one.

If your business could qualify for a line of credit with a little time or effort, then credit card stacking probably won’t be worth it for you.

Third, are you willing to damage your personal credit? If you need your credit score for anything else anytime soon, credit card stacking probably isn’t worth it.

Even if you use the credit cards responsibly, you’ll be adding a hard inquiry to your credit reports for every credit card application you submit. Six at once is usually enough to make lenders consider you high risk, and stacking might require as much as 15.

Finally, can you afford it? Credit card stacking isn’t the cheapest financing option. Credit card interest rates are high, and you may also incur annual or cash advance fees.

If you think you’ll probably end up carrying unpaid balances past the grace period once your introductory 0% interest ends, credit card stacking probably won’t be worth it.

It can get expensive quickly, and if you can’t keep up with your payments, you could lose your accounts, wreck your credit score, and get stuck with thousands of dollars in high-interest credit card debt.

Who Is It Right For?

Credit card stacking is only worth considering as an alternative to a business line of credit. It can help you finance day-to-day spending or medium-sized purchases in the short term, but it’s not a viable replacement for a business loan.

Assuming what your business needs is a revolving credit line, credit card stacking might be the right choice for you if you meet the following criteria:

• In business for less than two years: Banks probably won’t work with you if you’ve been in business for less than a couple of years. You might be able to qualify with an online lender, but the costs will be significantly higher.
• Low revenues: Traditional lenders are also unwilling to lend to businesses with less than $100,000 in annual revenue. You could get one from an online lender with around $50,000, but it will again be more expensive.
• Good to excellent personal credit: You’ll need a credit score good enough to qualify for several credit cards with a high credit limit. Ideally, you’ll be targeting cards with 0% interest introductory periods too, and they can be competitive.

Credit card stacking might be right for you if you meet the conditions above. However, it still ultimately depends on whether you can find and qualify for the necessary accounts and use them responsibly.

Keep in mind that there are always risks involved, even if you’re a prime candidate for the financing strategy.

What Are Credit Card Stacking Companies and What Do They Do?

Credit card stacking companies are service providers you can hire to complete the credit card stacking process for you. They typically find the cards that match your needs and credit score, then submit applications to each credit card company for you.

Many of these companies claim they can get you an unsecured line of credit and fail to mention they’re credit card stacking. They also charge a significant fee for their services, usually around 10% of your credit limit.

For example, Credit Suite’s Credit Line Hybrid will help you get a credit card stack up to $150,000, and they charge one-time success fees of 9.9%. If you qualify for five credit cards with $15,000 limits each, you’d have a $75,000 line and owe them $7,425.

Credit card stacking companies claim they have an expert understanding of which credit cards you should apply for as justification for their high prices. They say they know the tricks to minimize the damage to your score and maximize your chances of approval.

For example, if you already have an American Express card, the card issuer usually only initiates soft inquiries for subsequent cards. Knowing these things can help you optimize your strategy.

However, it’s unlikely that their services are worth the price. You can sort through various credit cards and find the ones with favorable terms just as well as they can.

Unfortunately, there are also a lot of scammers in the industry. For example, the Federal Trade Commission sued Seed Capital for providing credit card stacking services, then tricking customers into using their cards to buy Seed Capital’s training programs.

If you’re considering credit card stacking, know that hiring a company to do it for you means taking on additional risks. It may be better to do it yourself, even though it’s more work.

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