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Learning how to use credit cards wisely

Dear Dr. Don,
I'm new to the whole credit card scene. Does it matter how much you spend (if any amount at all) using your credit card in order to build good credit?
-- C.C. Max

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Dear C.C.,
Part of the scene is how your payment history influences your credit score. If you don't use your credit cards, you don't build a payment history. That payment history shows your ability to manage credit. It's important to build a strong payment history, meaning paying your bills on time, to increase the type and amount of credit that lenders are willing to provide you. A strong payment history with a credit card makes it easier to get a car or a mortgage loan later.

There are three main credit bureaus that provide credit reports: Equifax, Experian and TransUnion. Thanks to the Fair and Accurate Credit Transactions Act of 2003, you can get a free copy of your credit report from each of these firms once each year. I think it's a good idea to rotate your requests every four months, rather than to get all three at the same time. The Bankrate feature, "How to get your free credit report," tells you how to request your free credit report.

Lenders report your payment history to the credit bureaus. Your lenders don't necessarily have relationships with all three credit bureaus, so your credit history can vary by credit bureau. Your credit score is based on the information in your credit report. Each of the credit bureaus has its own variation of your credit score and, unlike the credit report, you have to pay to get your credit score from them. Bankrate, in partnership with myFICO.com, provides a credit score estimator that will give you an idea of your credit score for free.

Lenders use risk-based modeling to determine whether they will extend you credit and the loan's terms. The better your credit score, the more likely it is that you will repay your loan according to the loan's terms. Lenders can offer people with high credit scores better rates than people with low credit scores because they are taking on less risk. Lower interest rates mean less interest expense.

If you're new to having credit cards then you want to use them responsibly to build a payment history. Carrying a balance often doesn't make financial sense, but it can demonstrate to lenders your ability to manage credit. Keep any outstanding balances low, totaling no more than 50 percent of your available credit line.

Credit card companies make a lot of money on late fees, over-the-limit fees and any excuse they can find to raise your interest rate. A late payment on any credit card has the potential to raise the interest rate on all of your credit cards. Stay on top of your financial obligations, and don't get caught in these traps.

Bankrate.com's corrections policy -- Posted: Dec. 8, 2005
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