The short answer is yes, anyone can build a good credit rating by using a charge account. First let’s talk about the definition of credit cards. Many people are confused about the differences between a actual credit card and a Bank Card, or commonly known as a Debit Card
In general, a credit card lets you make purchases then you will be billed later. Most credit card accounts allow you to carry a balance from one billing cycle to the next, which allows you to pay off the balance over time. Although, you will usually have to pay interest on that balance.
A debit card is quite the opposite of a credit card. Being the fact that a credit card allows you to make a purchase, and then pay it off over time, as mentioned above. A debit card is simply a way to pay for purchase using funds in a bank account that is associated with that debit card. A common misconception about debt cards is that they report history to the credit bureaus, and thus help your credit scores. Unfortunately this is not true, and in most cases debit card activity is not reported to the credit bureaus.
There are many ways to build your credit score over time. Credit cards have a strong influence on the credit score calculation. Credit cards can be just as effective as any other credit product in helping consumers establish a credit history.
Whether you have a credit card or any other credit account, the most important factor in building or improving your credit score is using credit responsibly. That means paying your bills on time and using your credit only when needed. If you can do those things consistently, you should be well on your way toward maintaining a good score.
You may run into financial difficulties that impact your credit score. Some scenarios may cost you several points, whereas others may have a minimal impact on your credit scores. Common question, “Why does one negative weigh heavier on my scores than another?” Great question, and the answer is the scoring algorithms or commonly known as scoring models. Each model will treat a negative item differently, so the impact on your credit score may vary from one negative item to the next.
Here is a comparison of the impact that credit problems can have on the credit scores of two different people: Josh and Vanessa. Note that their initial credit scores are 100 points apart.
First, let’s give you a general snapshot of Josh’s and Vanessa’s credit profiles:
(These statistics are estimates and this information has been cited from myfico.com)
Josh has a credit score of 680 and:
Vanessa has a credit score of 780 and:
|Has six credit accounts, including several active credit cards, an active auto loan, a mortgage, and a student loan||Has ten credit accounts, including several active credit cards, an active auto loan, a mortgage and a student loan|
|An eight-year credit history||A fifteen-year credit history|
|Moderate utilization on his credit card accounts (his balances are 40-50% of his limits)||Low utilization on her credit card accounts (her balances are 15-25% of her limits)|
|Two reported delinquencies: a 90-day delinquency two years ago on a credit card account, and an isolated 30-day delinquency on his auto loan a year ago||Never has missed a payment on any credit obligation|
|Has no accounts in collections and no adverse public records on file||Has no adverse public records on file|
Current Credit Score
Score after one of these is added to credit report:
Maxing out a credit card
A 30-day delinquency
Settling a credit card debt
As you can see, there are many factors that impact your credit score. Some may be more damaging that others, and some may not weigh on your scores as much as you may think
High scores can fall farther. Notice that Vanessa would lose more points for each negative scenario than would Josh, even though her credit score was 100 points higher than Josh. That’s because Josh’s lower score of 680 already reflects his riskier past behavior. So the addition of one more indicator of increased risk on his credit report is not quite as significant to his score as it is for