How to Use a Credit Card to Build Credit
Good credit is one of the key elements of financial success. And, whether you’re just starting to build your credit history or trying to improve it, the strategic use of a credit card can really help boost your creditworthiness.
Read on to learn how to build credit quickly using a credit card, and our picks for cards you should consider if you’re just starting out.
- Credit cards to build credit
- How to build credit with a credit card
- How to check credit score
- What is a credit report?
- Alternative ways to build credit
- More about building credit
- How to Use a Credit Card to Build Credit FAQs
Credit cards to build credit
There are different types of credit cards, but broadly speaking they can be classified into two general categories: secured and unsecured credit cards.
While both types of credit cards can help you build credit, they have different features and cater to different types of borrowers.
Secured credit cards
Secured credit cards are backed by a security deposit, which the issuing bank requires you to make when you open the account. Typically, your credit limit is set to the amount of your deposit, and you may be able to increase it by giving a larger deposit.
Often used as starter cards, they can be a good option for those with poor or limited credit history because it’s much easier to get approval than with an unsecured one.
The best credit cards to build credit generally require an initial deposit between $100 and $300, and in some cases as low as $50. They may also feature perks such as cash-back on eligible purchases and no annual fees or foreign transaction fees.
Unsecured credit cards
Unsecured credit cards aren’t backed by a deposit, and the credit card limit will be based on your income, credit score, credit history and other factors.
Unsecured credit cards generally require a fair to excellent credit score — that is from about 580 to 850 FICO score — for approval, and offer much higher spending limits and better rewards than most secured cards.
Most of the best credit cards on the market are unsecured and offer a wide variety of perks — for example, travel credit cards will reward your spending in hotels, rental cars and airlines; balance transfer cards offer 0% APR introductory periods; and many offer cash back or points for gas, groceries and other everyday expenses.
These cards, however, may be harder to get if you don’t have credit history. If that’s your case, consider starting with a student credit card or a store credit card which, depending on your circumstances, may be easier to get.
Student credit cards
Student cards are geared to help college or university students build credit. These cards usually have higher approval odds than a standard credit card, even if you have limited credit history. Sometimes all that’s needed is proof that you’re enrolled in a higher education institution and a stable income.
Although student credit cards often come with lower credit limits, some can offer access to rewards programs and other perks like travel insurance. In fact, some of the best student credit cards offer cell phone protection, annual bonuses and cash back on qualifying purchases, including dining, entertainment and select streaming services.
Retail store cards
Store credit cards may also be easier to qualify for than standard credit cards if you have a limited credit history or low credit score. These cards can offer advantages for frequent shoppers, such as discounts on purchases and access to promotions or special financing. They may also offer rewards programs that allow you to earn points on every purchase.
Store credit cards, however, can feature higher interest rates and, depending on the issuing retailer, may not be widely accepted outside the specific store or its affiliated network.
Our list for the best credit cards for groceries includes some cards from superstores you can consider, such as Sam's Club, Costco and Amazon.
How to build credit with a credit card
Whether you’re trying to repair poor credit or are building your credit history from scratch, there are well-established ways to improve your credit score effectively and efficiently. While they all take time, they are basically foolproof and guaranteed to provide positive results.
There are six factors that impact your credit score: payment history, credit age, credit card usage, total accounts, derogatory remarks (such as late payments or bankruptcies) and the amount of inquiries on your credit report.
It’s important to note that it may take longer to repair a poor credit history than to build credit from scratch, but the process of repairing bad credit is very similar to that of building and maintaining a good credit history.
Make on-time payments
While there are several schools of thought about the best tactics to pay off credit card debt, they all agree on the same thing: always pay your monthly credit card bills on time.
Making on-time payments may be the single most important thing you can do to build good credit. Delinquent payments significantly impact your credit score, incur additional fees and may cause the issuing bank to raise your interest rates or lower your credit limit.
A simple way to ensure you never miss a due date is to set up automatic payments. Doing so may also help you reduce any stress related with managing your finances, since you won’t have to worry about remembering your due date. Another advantage is that most credit card issuers let you set the frequency of your payments along with the amount you want to pay — the minimum payment, a fixed amount or the full credit card balance.
Keep balances low
Another factor that helps determine your credit score is your credit utilization ratio. This represents the percentage of available credit you’re using. For instance, if you have a credit card with a $5,000 credit limit and have used $2,500, it would mean you have a credit utilization of 50%
A higher utilization rate can negatively affect your credit score. Yet, having too little or no utilization at all won’t be beneficial either, since it won’t show your credit usage.
A good rule of thumb is to keep your credit utilization ratio below 30% for the best effect on your credit score. Lower ratios, such as 10%, are even better for your credit score.
Limit your credit inquiries
Applying for additional credit cards or other credit-related products, such as loans, can also impact your credit. Each time you apply for new credit, a lending institution pulls a copy of your credit report, which causes an inquiry to appear in your file. This temporarily lowers your credit by a few points.
Credit inquiries remain in your credit file for one year, and let potential lenders know how often you request for lines of credit. Opening too many accounts within a short period of time is often viewed negatively by creditors, so it’s best to limit the number of inquiries.
Keep accounts open
Credit age is another important factor in building credit. Your credit age is generally the average of how long all your credit accounts have been open.
Since creditors generally favor longer credit histories, it’s wise to keep your accounts open, even if you don’t use them that often. Closing them could affect your credit in multiple ways.
For instance, closing an older credit card account can impact your credit age and also reduce your total available credit, which can result in an increase in your overall credit utilization. Both things can potentially lower your credit score.
Review your credit report
Review your credit report for accuracy. By law, you’re entitled to a free credit report from each of the three major credit bureaus — Experian, Equifax and Transunion. Although before you could get a report every twelve months, under the provisions of the CARE act passed during the pandemic, you can now request free weekly credit reports.
Check for any errors in the information reported, such as inaccuracies in your personal details, account information or payment history. You can also look for negative items, such as missed or late payments, that might have been reported incorrectly or that have remained longer than they should. (Most negative items should drop off after seven years.)
If there is incorrect information, contact your credit card companies, banks and the credit reporting agency as soon as possible. You can also dispute any credit report error with the credit bureaus online or by writing them.
How to check your credit score
Checking your credit score is a relatively straightforward process and there are multiple ways to do so. These include:
- Credit monitoring services: There is a wide variety of credit monitoring services, such as Credit Karma, Experian, Aura and Credit Sesame, that offer access to your credit score either for free or a monthly fee. The best credit monitoring services typically also offer access to additional features like security alerts and trackers that let you know of any changes in your score real-time.
- Online banking: Many banks offer free access to your credit score through their banking apps or website. You simply have to log in to your account, and check if there’s a section that displays your credit score.
- Credit Card Statements: Some credit card issuers also provide updates of your credit score on your monthly statements.
What is a credit report?
A credit report is a detailed record of your credit history and financial behavior. It includes a summary of your personal information, such as the addresses where you’ve lived, phone numbers and known employers, along with a list of all your credit accounts, recent inquiries, collections and public record items like bankruptcies.
How does credit reporting work?
Financial institutions, including creditors and lenders, regularly report your credit usage to the major credit reporting bureaus: Experian, Equifax and TransUnion. These agencies receive, collect and maintain a record of your credit history which they then use to generate your credit report whenever you or a creditor request it.
The information collected is also used to calculate your score using a credit-score model like FICO and VantageScore. Credit scores range from 300 to 850.
Over time your credit score is adjusted up or down as your creditworthiness changes according to how much debt you have or if there are any indications that you may have difficulty paying your debt, such as missing or late monthly payments.
Alternative ways to build credit
Credit cards are not the only option available to build credit fast. Depending on your situation and circumstances, you could also consider the following options:
Credit builder loan
A credit-builder loan is a type of loan designed for people who have little or no credit history. In a way, these loans are like a savings account. Instead of giving you an upfront lump-sum after approval, the bank holds the money in a savings account. You then make fixed payments toward the account until you pay the bank the full amount. Meanwhile, the bank reports your payments to credit bureaus helping you build credit. At the end of the term, the bank distributes the money back to you.
Become an authorized user
Another way to build credit is to become an authorized user in someone else’s account. For instance, if someone close to you has a positive credit history, they could add you as an authorized user on their credit card account. This way you can both build credit together. However, this is a serious decision that requires a lot of trust, because if for some reason you or the primary cardholder fall behind on payments it can impact both parties’ credit score.
Rent reporting
Rent payments are generally not reported to credit bureaus since it’s considered a non-traditional credit reference. However, platforms like RentTrack, Esusu or Zergo specialize in reporting rent payments to credit bureaus. For this to happen, you have to enroll and make your rental payments through any of these payment processing services.
However, note that while certain credit scores take into account rent payments history, such as FICO 9 and 10 scores, these are not as widely used. This means that the benefit will depend on which credit score model a particular creditor uses.
More about building credit
- 5 Best Credit Monitoring Services
- The 4 Most Common Credit Score Myths
- How to Dispute Your Credit Report
- How to Freeze Credit
- How to Repair Bad Credit
- How to Use Rent Payments to Increase Your Credit Score
- What Can Hurt Your Credit Score?
How to Use a Credit Card to Build Credit FAQs
How long does it take to build credit?
The length of time it takes to build credit varies depending on your credit card usage and other factors, such as whether you're repairing poor credit or establishing a credit history for the first time.
However, using your card often but paying it off every month can cause your credit score to increase quicker than if you seldom use it. This will allow credit reporting bureaus to collect more data, which over time can result in a marked improvement in your credit score. The key is to be patient and consistent in your efforts to build your credit.
What is the best credit card to build credit?
What helps build credit?
Can applying for credit cards hurt your credit score?
While having too many credit cards won't necessarily harm your credit score, applying for multiple cards can have a negative effect. Each time you apply for a credit card, the lender requests a copy of your credit history to review your creditworthiness. Also called a hard inquiry, this action can have a temporary negative impact on your credit score, lowering your score by a few points.
Though the effect is minimal, too many hard inquiries over a short period of time can also be interpreted as a sign of financial difficulties, causing banks to be more cautious about approving loans or credit applications.Summary of Money’s How to Use a Credit Card to Build Credit
- Secured credit cards are often good starter cards and good options if you have limited or poor credit history.
- Student cards and retail store credit cards can also help you start building your credit since they tend to have higher approval odds than traditional credit cards.
- Building credit requires time and discipline.The best ways to do it are making on-time payments, keeping a credit utilization ratio below 30% and limiting the amount of inquiries to your credit.
- Request a credit report at least every six months (though you can get free weekly reports) so you can review your information and ensure there aren’t any inaccuracies in your credit history.
- Other alternatives include credit-builder loans, becoming an authorized user to someone else’s credit card and reporting your rent payments.