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Using Credit is Important for Your Credit Score

Whether you’re applying for a new credit card, renting an apartment or taking out a mortgage, your credit score is a good indicator of whether you can pay off the amounts you borrow. It’s important to help you get loans, mortgages, and even credit cards.

The good news is that there are several ways to build and improve your credit score with a credit card. And understanding the elements that make up your credit score, why it’s important, and how to build and improve it, can make it easier to secure loans and credit cards now, and in the future.

What is a Credit Score?

Simply put, your credit score shows your ability to borrow money and repay it responsibly. It’s a three-digit number that’s often reviewed by banks, credit card companies and lenders to determine how much money they’re willing to lend to you, and at what rate. It looks at important elements of your credit report, like payment and credit history, the amount of credit you use, and any debt you carry to indicate how likely you are to pay off any money you borrow. Understanding how these work will help you build and maintain a strong credit score for the future.

Why is Having a Credit Score Important?

Since your credit score indicates how likely you are to pay your bills, it helps lenders to decide whether or not to lend you money. In addition to other factors, a good credit score can help you qualify for better interest rates, increase the likelihood that you’ll be approved for new credit cards or loans, and help you get approved for higher credit limits. If you’re an existing RBC Online Banking client, you may be able to check your credit score in online banking.

How to Build or Improve Credit with a Credit Card

How to Build or Improve Credit with a Credit Card

If you don’t have a credit score, or it’s lower than you’d like, using a credit card can be a great way to improve or build your credit rating. Spending within your credit limit and paying your bills on time every single month are just a few ways you can improve your credit score, simply by using your credit card responsibly.

Apply For a Credit Card That Matches Your Spending Goals

One of the first steps in choosing a credit card is finding one that best fits your budget and spending needs. First, apply for a card with a credit limit above your spending needs. Why? Because spending near or over your limit each month may actually lower your credit score. Secondly, choose the benefits that matter most to you. For example, cash back cards can help offset the cost of spending, while some rewards cards let you use points to help pay down the balance due each month. We also have options for no annual fee cards, travel and even cards with lower interest rates if you carry a balance. With a variety of credit cards to choose from, RBC can help you find the one that’s right for you.

Understand How Much of Your Available Credit You’re Using

Your credit utilization ratio compares how much of your credit card limit you’re using, for each billing cycle. You can determine the ratio by dividing your total credit card statement balance, by your total credit card limit. For example, if your credit card bill is $800 and your limit is $1,000, your credit utilization ratio is 80%. A lower number—under 30% is good, and under 7% is ideal—shows that you’re managing your available credit well. A single month of big spending won’t make a significant impact to your ratio, but try not to make it a habit. Keep an eye on your credit utilization ratio as an average of how much money you borrow on a regular basis.

Pay Your Credit Card Bill Every Month

Paying your bill each month helps build a track record of repaying your debt consistently. You can pay the full balance, the minimum payment, or somewhere in between, but it’s important to know how much of your available credit you’re using each cycle. If you’re carrying a balance, try to keep it under 30% of your total available credit. This will avoid any negative effects on your credit score and also help minimize the amount of interest you’ll have to pay. But if carrying a balance is something you do regularly, we can help you learn how to reduce your credit card interest payments with one of our low interest credit card options. Paying your full balance is best, but it’s just as important to make your payments on time, every cycle, and stay within your available credit limit. These actions create a trend of how you manage payments and help to determine whether lenders will let you borrow more money in the future.

Make Your Payments on Time

Lenders look closely at payment history to make sure you’ll pay your loans on time and in full. With payment history making up approximately 35% of your credit score, a history of late payments can have a significant impact on your credit rating. Using RBC Online Banking or the RBC Mobile app makes it easy to pay your bill immediately or set up recurring payments. Payments can also be made via phone or mail, and in-person at a branch. RBC makes paying your credit card bill easy, so you can focus on things that matter most to you.

Use a Credit Card as a Tool, Not a Borrowing Mechanism

You can use your credit card to build credit, improve your credit score, manage expenses, earn points or cash back, and so much more. It’s important to use your card at least once every month as you try to build credit, but make sure you’re making purchases you can pay off at the end of each month. When you carry a balance over to the next billing cycle, you’ll pay interest, and it can also negatively impact your credit score if you’re using too much of your credit utilization ratio. Instead of using your credit card as a means to borrow money, think of it as a purchasing tool with different types of benefits. Since credit cards have much higher interest rates than other means of borrowing, you can end up owing far more than you’ve borrowed.

Building Credit Takes Time and Patience

There’s no quick fix when it comes to building and improving your credit score. In fact, trying to rush the process can actually have the opposite effect. Applying for multiple cards in a short amount of time can get you automatically denied, and the repeated hits to your credit report can have a negative effect on your credit score. Instead of looking for a quick solution, try looking at the long term one. Focus on meeting your existing credit card obligations such as paying your bill on time each and every month, staying within a reasonable credit utilization ratio, and using your credit card responsibly. Since your credit report stays on file for years, it takes time and patience to make an impact. But the steps you take today can have a positive effect on your ability to access credit in the future.

When managed responsibly, your credit card can help build and improve your credit score, making it easier to get approval to borrow money for bigger purchases in the future. Are you ready to use a credit card to build credit? Our credit card selector can help narrow down the choices to find the right credit card for you.