Best ways to build credit with a credit card
Whether you’re starting with no credit history or hoping to improve your current credit score, using a credit card responsibly can help you reach your goal. Use these simple tips to get started building your credit with a credit card.
Use a secured credit card to build credit
If you don’t qualify for a traditional credit card, consider a secured credit card. This type of card works just like a traditional credit card but it’s “secured” by a cash deposit made to the bank and serves as collateral if payments are not made. You swipe it when making purchases and pay off the balance at the end of the month to avoid accruing interest.
If you fail to pay off your credit card balance, the bank may take your deposit and apply it towards the balance. On the other hand, if you demonstrate good credit card management for a sustained period, your bank may return your deposit and increase your credit spending limit. A secured credit card can help you build credit even if you’re starting from scratch.
Become an authorized user
Another way to build credit using a credit card is to “piggyback” on a family member’s credit card by becoming an authorized user on their account. If they have good credit, you’ll also start building good credit due to their credit history.
The downside to becoming an authorized user is that credit can become intertwined, causing a bit of a headache when you try to untangle your accounts in the future. Also, if either one of you starts experiencing bad credit issues the other person’s credit may be negatively impacted as well.
Choose a card with good perks and low fees
When applying for a new credit card it’s important to choose the right one for your situation. Not all credit cards are created equal — some offer valuable perks and benefits that others do not. Look for a card that offers cash back or rewards of some kind to get the most out of your credit card experience.
Be aware of potential card costs. This includes knowing the interest rate you’ll have to pay on carried-over balances and how much it costs to use your card for a cash advance (which is typically a bad idea). Some cards that offer more exclusive benefits may have an annual fee as well.
Card with good perks
Look for a card that offers perks that complement your shopping habits without hidden fees. Some cards allow you to accrue travel miles, others give you cash back on purchases. Using a card that rewards you for the purchases you already make is like a double bonus.
Keep your balance low to build credit
A major factor in maintaining good credit is low credit utilization, which refers to your balance-to-credit-limit ratio. Try to keep it around 30% or less. For example, if your credit limit is $1,000, aim for utilization at or below $300, which is 30% of the $1,000 credit limit.
A great way to keep your balance in check every month is to use your credit card for small but regular purchases, like groceries. Then, review your transactions every week and schedule payments more often to keep your balance in check.
Enroll in auto pay
A smart way to build credit is to set up auto pay for your monthly bills. Set up your household expenses, such as utility, internet, and insurance bills, to be paid automatically each month using your credit card.
Next, log into your credit card account and enroll in auto pay from your checking account. This will ensure your credit card is paid on time every month. Setting up auto pay makes your life easier, with less paperwork and less time spent managing your bills.
Limit the number of credit cards you own
When building credit using a credit card, you only need one account. There’s no need to complicate your finances by juggling multiple cards, balances, and payment dates. Plus, applying for too many credit cards at once can have a negative effect on your credit score. Every new credit card application triggers a hard inquiry on your credit report which temporarily causes your credit score to go down.
In addition, creditors will see that you’re applying for multiple credit limits and may view this as a need to take out a lot of debt. They may see you as a credit risk and not approve you for future credit applications.
Keep your accounts open to build credit
The longer you use a credit card, the more reputable you become in the eyes of lenders. Don’t get into the habit of opening multiple cards and then closing them when you’re not using them. Limit your credit card usage to just one account and then put the others away in a safe place.
Closing any unused accounts lowers the average age of your credit, which can hurt your credit score. Your length of credit history makes up 15% of your FICO score, so it’s important to keep your accounts open if possible.
The Bottom Line
It’s easy to mismanage credit card usage, but that doesn’t make credit cards inherently bad. Responsible credit card management can help improve your credit score without taking on unnecessary debt. Follow these best practices to steadily improve your FICO credit score. For a full breakdown of what makes up a credit score, check out The Complete Credit Score Guide.