A subprime credit card can be handy in building your credit. Time and again, everyone’s reminded to use it responsibly. Still, it’s the most wonderful time of the year to shop and drop. Before you go all-out shopping, read these gentle reminders that are relevant not just on holidays but all the days you’d be holding your credit cards.
Get to Know Your Credit Card
What fees and penalties does it carry? Can you waive your annual fee? Does it come with a sign-up bonus? Can you earn points every time you make a purchase? What warranties does it offer?
It pays to research about these things so you’d know the cost or reward every time you swipe your credit card. For every credit card, there is an appropriate product or service as evidenced by airline cards, store cards, and fuel cards.
Needs, not Wants
When you run out of cash for bills, do some grocery shopping and spend on needed expenses, a credit card is most useful. But it’s not for everyday use or impulse buying. Overspending is a step closer to burgeoning credit card debt.
Pay on Time, in Full
Every time you make a purchase, make sure you pay your credit card balance on time, in full, and every month. This saves you on interest and keeps your credit healthy. If you make late payments or skip one too many, these things could happen:
- A late fee that ranges from $15 to $35, as it varies with the provider.
- An increased interest rate that could go up to $29.99%. And if you have a zero-interest introductory period, you could lose this perk.
- A decreased credit score as it will leave a negative mark on your credit report.
Stay Below the Limit
Experts advise that you keep a credit utilization ratio that is below 30%, a benchmark score. Credit utilization ratio is how much you owed on all your credit cards divided by the sum of all your credit card limits.
- Credit Card A has an outstanding balance of $3,000 with a credit limit of $6,000
- Credit Card B has an outstanding balance of $2,000 with a credit limit of $4,000
So, your total outstanding balance is $5,000 divided by $10,000, equals to 50% credit utilization ratio. A credit utilization ratio that is higher than 30% is deemed a higher risk and can lower your credit score.
Put simply: if you have a subprime credit card with a limit of $1,000, you should use only $300 or lower.
Bad Credit Card for Good Credit
Credit utilization forms a chunk of your credit score. An equal, if not of higher importance is your payment history, which measures how responsible you are as a payer.
If you’ve been using your subprime credit card prudently as noted above, you can expect to see a gradual increase in your credit score. Don’t miss out the chance to improve your credit profile and be a wise spender.