Erica Sandberg is a prominent personal finance authority and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” She writes “Opening Credits,” a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
Dear Opening Credits,
If I buy whatever I want on a credit card then pay it off the next day, is that a way to build my credit up? — Christopher
Boy, I admire a credit strategist! Someone who looks at the world of borrowing and banking and wonders, “Hmmm, how can I make this system best work for me?”
And the answer is yes. You can make as many purchases on your credit card as you would like to (up to the account’s set credit limit, of course), and pay off the balance at any time you wish. Why wait for a statement to arrive in the mail once a month? You certainly don’t need to.
The benefits of prepaying are multifold. Send in the cash before it’s due and you’ll never be assessed a penny in interest. After all, the credit card company will only apply finance fees to what you spend after the grace period has lapsed and when you send less than the total amount you charged. Pay in full and you get a free loan for somewhere between 20 to 30 days. More, you won’t be responsible for paying expensive late fees, because you’ll be the earliest bird around. Also, if you do use the card to pay for everything you want and the account comes with a rewards program, you’ll surely rack up the points.
Be aware, though, that same-day charging and paying won’t necessarily create a credit history faster than if you were to wait to the end of the month to pay. This doesn’t mean that it’s not a terrific plan — it is if you can stick to it. And it shouldn’t be that hard if you make it a habit. Use the card for only the products, services and other expenses that you can afford, then quickly jump online and pay for them on your bank’s or the creditor’s website. You can also use any of the excellent personal finance management software and apps that are available, as they also help you keep track of spending and investments.
But to back up, let’s talk about what it means to “build credit up.” When you borrow money from a financial institution — which you are doing when you use a credit or charge card — you are indeed building a credit history. The creditor sends notices of your activity to the three major consumer credit reporting agencies: TransUnion, Equifax and Experian. Those agencies take all that information and compile it into a report (sometimes called a file), which they then sell to lenders and other businesses that want to know how you’ve managed credit so far. With those reports (and the credit scores that are derived from the data on them), they can determine if you are a good or bad credit risk, and what kind of terms they will offer you if they accept you as a customer.
When you prove that you can borrow and then repay according to the terms of the contract, you establish (or if there have been problems in the past, re-establish) credit. Another way to enhance your history and scores is to have several different account types, such as an installment loan and a charge card, in addition to your credit card. The more years you can show just how adroit you are with all sorts of loans and lines of credit, the more impressive you become to those who care about such things.
So all in all, I say your pay-each-day plan is a very smart one. Go for it.
See related:8 creative ways to rack up credit card rewards points quickly, Get out of debt smart phone apps, FICO’s 5 factors: The components of a FICO credit score, How your FICO credit score is calculated: Types of credit used
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