Does paying bills or shopping with a credit card build credit better?

Question

Okay, so the only reason I got a credit card was to build credit; Right now I use my credit card 3 times per month to buy gas, then I pay it off as soon as the bill is due. Would it make any difference if I setup an automatic bill payment FROM my credit card to... say... Verizon, and also setup an automatic bill payment from my bank TO my credit card every month. Would that make any difference in building my credit vs what I'm currently doing?

Answer 1

Your credit card company makes money from 3 ways: Interest and penalties; annual Fees; and a percentage of each transaction.

The more money you move through their card, without being late with payments, will encourage them to give you a larger credit limit. Which will allow you to move more money through their card.

Yes, using too much of your credit limit will hurt your utilization number and lower your score; but unless you need a high credit score now proper and frequent use of the credit card will allow them to expand your credit limit. Which gives you more ability to use the card and keep your utilization number low.

It doesn't matter if the card is used to pay for gas, or to pay the electric bill. Anything that you would use a debit card for can be charged to the credit card. Many utilities can be paid using the card.

Two big cautions. You don't want to pay fees to get a higher credit score. So always pay it off each month so you don't have to pay interest. The second thing is don't charge anything that requires a fee to use the card. Some local governments charge a 2-3% fee to charge your property taxes, which will generally be greater than any cash back card will award you.

Getting a great score take time.

Answer 2

1. Number of credit card accounts you have matter to an extent.

2. When you get a new card use the card and before bill is generate at least have around 1% usage on that card. You can have 0% usage on all other cards. 1% is 1% of your total credit available across all cards. For example, if you have two cards with $1000 credit limit each, you have a total credit line of $2000. Say you are getting a new credit card with $2000 limit. Use the new card for the first month for as much as you want BUT BEFORE BILL IS GENERATED, pay off everything except say, $40 (1% of total credit line - $1000(1st card) +$1000(2nd card)+$2000(new card)). You can report $0 balance on the two existing cards. This is the best case scenario. Total utilization of 1%-9% is considered ok, but try to avoid reporting balance in all the cards all the time.

3. Carrying a balance just for the sole purpose of increasing credit score is not at all required.

Therefore, it doesn't matter at all how you use it, Percentage of utilization certainly matters. Another thing you might want to note is some banks/institutions like Discover, Amex report to the credit bureaus (CBs) passively - i.e., the statement balance only, while a few others like local credit unions allow CBs to pull information on any certain day of a month (your outstanding balance on that day is used by the credit bureau will be used against that card for a month).

Also note that maintaining the 1% is important. If you go below 1% (less than $40 in the example above, you might see a minor decrease in your score.)

Other than these, nothing else you do - mode of payment, how and where you use the card etc., do not matter most of the time as long as it is not cash withdrawal from credit card (Don't do it under ordinary circumstances).

Additional tips: Maintain a good payment record and if you have steady income, apply for a some good branded card like Discover after 4-5 months. If you get a good limit, wait for 3-4 more months and apply for another good card like Amex. Do not apply for two many cards in the process. Websites like MyFico.com Forums will tell you what types are cards you are mostly likely to get for your credit profile. Choose an entry level card after thorough research and apply for it. Sign up for free monitoring for indicative scores like CreditKarma which do not provide actual score but some educational score which you can track overtime. If you mistakes your scores will go down. Don't worry these scores are transitory. As long as you make errors in utilization or things like that you can rectify it in the next cycle (most likely, next month).