My first experience building credit was with a credit card that I opened while I was attending college. Thankfully, I avoided the classic college mistake of maxing out the card in the first month of ownership, then living with debt for the next 10 years. My goal was to apply for the credit card, make a several hundred dollar purchase, then pay off the loan over a couple months to prove I was capable of making regular payments. I paid a few dollars in interest charges over the time I made those payments, but in my opinion, a few dollars in finance charges was well worth building my credit history and credit score.

It has been well over ten years since I opened my first credit card and I haven’t made a finance charge on a credit card since then. That experience and several other successful loans since then have helped me build a high credit score and a favorable credit history.

Using credit cards to build credit history and credit score

Credit cards aren’t the only way to establish your credit history, but they are usually the easiest way to create a credit history because it is usually easier to open a credit card than other forms of credit such as a car loan or mortgage (lenders are less likely to lend that much money to someone who doesn’t have any credit history).

Once you have established a line of credit, your actions are reported to the credit bureaus which begin recording your credit history on  your credit report. Over time, your actions will be used to determine your credit score. Here is more information about the difference between credit report and credit score.

No credit or poor credit? If you are having trouble getting approved for a credit card, then you should check out secured credit cards, which require a deposit and sometimes come with an annual fee. The deposit works as collateral for your charges and if you don’t make on time payments, the bank will use your deposit to pay your charges. Secured credit cards cost a little more than traditional credit cards, but they often come with guaranteed approval and with proper use will help you improve your credit score. After proving your ability to make payments, you can often upgrade your secured credit card to a non-secured card that has a better interest rate and doesn’t come with annual fees.

Important notes about building credit with a credit card

Getting a credit card can help you build your credit so long as you treat it responsibly – otherwise you are only going to hurt your credit score. Credit cards can be a trap for some people, so it’s best to make sure you only make charges you can and will pay in full each month. Otherwise you may find yourself getting into a cycle of debt that is difficult to escape from.

Tips to establish your credit and increase your credit score:

1. Understand how your credit score works.
2. Only charge what you can pay with cash.
3. Pay your full credit card bill each month.
4. Repeat the process.
5. Add time.

What is a good credit score range? The key to establishing a good credit history and good credit score is being able to prove that you are responsible and can continually pay loans that you receive. There is no silver bullet to improving your score quickly; it takes time and commitment.

Credit card debt can be a budget killer, especially with many credit card companies raising interest rates.It’s not uncommon for credit cards to come with interest rates around 15% or higher. It can take 10 years to pay off your credit card debt if you only pay the minimum on each card. Even if you pay extra on your cards it can take years.

The best way to get rid of credit card debt is a combination of lowering the amount of interest you pay and paying extra on your credit cards. I recently had a reader contact me about using a Home Equity Line of Credit (HELOC) to consolidate his credit card debt so he can pay it off more quickly. Below is his question, some pros and cons to using s HELOC to consolidate credit card debt, and some alternative options.

Should I use a HELOC to consolidate credit card debt?

I was on your website and was reading your information about HELOCs and other vehicles that can help to secure / pay off unsecured credit card debt. I am fortunate in the fact that my house is paid off in full and last year appraised at about 450k. That said, I have about 34k in credit card debt that is eating me alive. Is there a way for me to borrow against the full equity I have in my house to pay all the credit cards off? I want to make a wise choice and not a foolish one. Please let me know what my options are.

Thanks, Chris

Chris, thank you for reading my blog and contacting me.It’s awesome that you eliminated your mortgage, and hopefully you can eliminate your credit card debt. The following is giving general information, not recommendations. Always do your research before making important financial decisions.

Pros and Cons of using a HELOC to consolidate Debt

HELOCs are a flexible line of credit. They are always open, which means you have access to the equity in your home at any given time. Their flexibility makes them a great option for debt consolidation, home improvements, or an emergency source of funds. The interest rates are also usually affordable, often coming around 5% or so.

While there are many benefits and uses for HELOCs, there are also associated cons to using a HELOC. The biggest downfall is that you are tapping home equity; if you default on the loan, the bank can take your home. Because you are laying your house on the line, you need to make sure you have the cash flow to cover the loan.

Best debt consolidation options

The most important things to look for when doing your own debt consolidation plan is the interest rate, whether or not the debt is secured, and flexibility. Your credit cards are currently unsecured loans, meaning the banks can’t repossess anything if you default on your loan. A mortgage or HELOC would be a secured loan, as would a car loan, meaning the lender could repossess the item if you default.

o% balance transfer credit cards. 0% balance transfers allow you to transfer your credit card debt to a 0% interest credit card. There is usually a 3-5% fee to do transfer your credit card debt, but you lock in 0% interest rates for up to 12 months. This is an incredible deal if you can pay off your credit card debt in that amount of time, and will probably save you the most amount of money in the long run. You can save a lot of money with 0% balance transfers.

HELOC. The next option to save the most amount of money is a HELOC, which usually has an interest rate around 5% or so. The downfall is that your debt is secured with your home, so if you don’t want to default!

Personal line of credit or P2P loan. You may be able to get a personal line of credit through your bank, or you may be able to get a peer to peer loan through a company such as Lending Club or Prosper, which both allow regular folks to loan people money for things like paying down credit cards at a lower interest rate. The interest rates are generally a little higher than HELOCs, but are lower than most credit cards.

Change your spending habits!

All of these ideas can help you save money, but the most important thing to do is to change your spending habits in regard to credit cards. You will not be able to pay your credit cards off quickly if you continue adding debt to them. Make the commitment to no longer using your credit cards, then consolidate your credit card debt to a lower interest rate. Then begin aggressively repaying your loans to get them eliminated as quickly as possible. Once you have completely eliminated your debt you will enjoy a much higher monthly cash flow and you can begin watching the power of compound interest work for you, not against you!

Best of luck, and I hope you are able to pay of your credit card debt soon!