Why is building your credit so important? Well, as mentioned in our last blog post, What's your credit score?, landlords generally require a credit application, which can impact your selection of off-campus housing. For a list of properties available, click here.
More importantly, building and increasing your available credit can help increase your credit score. How? By reducing your overall credit utilization ratio, which is the ratio of outstanding credit divided by total credit available. Credit utilization weighs in at 30% of your overall credit score. So, reducing your credit utilization ratio, by increasing your available credit, ultimately increases your credit score just by building credit.
For example, if you have $100 of credit and you have a balance of $10, your credit utilization is 10% ($10/$100), which is not so good. If you build your credit to $200, your utilization ratio is now only 5% ($10/$200), which is much better.
It is true, however, that a credit card application generally results in a hard pull, or inquiry, on your credit score. The result is a temporary hit to your credit score by 5 to 6 points, which reverses itself in a few months at the maximum. What's important is the increase in credit available, to decrease your credit utilization ratio and increase your overall credit score.
You're probably thinking, that's crazy and contrary to all the advice you've ever heard. And that was the advice we also received, until we learned about how credit scores are actually calculated! If you have very low credit outstanding, you may already have a very good credit score. Sign up for a free account at Credit Sesame to check your credit score. If you do have a very good credit score, consider applying a travel rewards that offers significant travel benefits, like the Chase Reserve rewards credit card that comes with a 100,000 points bonus if certain spending thresholds are met and a $300 travel statement credit, just to name two.
With that said, credit is a double edged sword and must be used cautiously. If you have credit balances outstanding, and possibly a lower credit score, getting approved for additional credit may prove difficult. That doesn't mean you should not try to increase your credit available or plan to pay off your balances, even just the minimum payments. Paying timely can contribute up to 30% of your credit score, so pay on time, every time, even if it's just the minimum payment.
Furthermore, credit cards sometimes have promotions with low or zero introductory rates, which could help reduce the interest fees charged to your outstanding balances. Figuring out a plan once you are in debt is vital, which is why we recommend paying off credit balances in full every month to begin with.
So next time you get a credit card offer in the mail, don't be so quick to throw it out. If it's a good offer, consider applying. Your credit score will thank you.
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