How credit cards can build and maintain a strong credit rating.

Spring often gets us thinking about outdoor parties and vacation plans – and credit can be a convenient means to finance the fun. To establish and keep a good credit rating, it’s essential to follow two straightforward steps:

  1. Borrow money
  2. Repay the money on time

When you follow both these steps, you incur debt in a way that builds value and establishes you as a good credit risk. Paying off your balance on time, every month, demonstrates to lenders that you are able to handle credit and repay loans

When you delay repayment, you’re incurring debt in a way that flags risk and can negatively affect your credit rating. Lenders may be less willing to help finance larger purchases – or they may charge higher interest rates to do so.

Understanding your own spending behaviour, and how you handle credit, goes a long way to successfully building a strong rating. Here are some common questions on credit cards and building your credit rating.

Does it matter how many credit cards I have?

The number of cards you have doesn’t weigh as heavily on your credit rating as the total amount that is owed, or the percentage of your total credit that the debt represents. For someone who is just starting out or repairing a poor credit history, or for someone who tends to overspend and max out credit limits, one card is likely enough. Having multiple cards may also expose you to a higher risk of fraud or identity theft.

If you are a responsible spender, pay on time and do not carry large balances, additional cards probably won’t hurt. Before you fill in applications, keep in mind that some issuers may cancel credit cards as a result of inactivity. Opening or closing multiple cards at once may also reflect poorly, as lenders may wonder why so many credit inquiries appear on one profile.

How can my credit limit increase?

Generally, limit increases are based on your proven ability to pay back what you owe on time. Asking for a higher limit on an existing card may provide the same benefit as applying for a new card. Using a new card to pay off one balance, without reducing spending or paying down the old debt, is rarely a good strategy. 

What about rewards?

Points, travel miles, rebates, low rates on balance transfers – promotions may not be the only things attached. Often rewards cards charge higher interest rates or annual fees than regular credit cards do. Moreover, satisfying he term s and conditions to qualify for the rewards may tempt you to make unnecessary purchases, counteracting the benefit of rewards.

What if I can’t pay off my balance?

If your balance gets out of hand and becomes difficult to pay down (especially at a high interest rate or on more than one card), consult with your advisor or banking professional. He or she may be able to suggest methods to consolidate your debt at a lower interest rate. Consider retiring one or more of your cards to cub spending until repayments are back on track.

How does my credit card history affect loan applications?

Lenders prefer to loan money to borrowers who are likely to repay. For example, banks will check credit scores before approving a loan for a car, a home or other large purchase. They may decline an application or charge a less favourable interest rate if they think you are a higher credit risk. Mortgage lenders especially like to compare outstanding debt with income levels to ensure there will be sufficient cash flow to honour monthly payments. To see what lenders see, you can request a copy of your credit report free from Equifax (www.equifax.ca) or TransUnion (www.transunion.ca).

Your credit history is an important aspect of your overall financial health. For specific guidance on establishing and maintaining a good credit, speak with your advisor.