Building your credit is an essential part of American financial stability and literacy. A good credit score can help with the process of applying for loans and other financial products, making knowing how to build credit with credit cards an essential skill for financial success.
People with good credit scores have an easier time getting approved for loans and generally receive better interest rates or promotional offers. A good credit score can lower your interest rates on existing credit card accounts, saving you money over time and allowing you to pay down your debt faster.
You have to use credit to build it, and understanding how to increase your credit score while building your credit history is an excellent first step. Read on to learn more about how you can build or repair your credit quickly and effectively through responsible use of the best credit cards.
Secured vs. unsecured credit cards
There are two main types of credit cards: secured and unsecured. While both types of credit cards can be helpful for building your credit, they provide different benefits for different situations, and your choice will depend on your circumstances.
It’s important to note that both secured and unsecured cards may have monthly maintenance fees, late fees and other penalties for late or missing payments.
Secured credit cards
Secured credit cards are backed by a 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, though you may be able to increase this by depositing more with the issuing bank.
Often used as a starter card, they can be a good option for those with poor or limited credit history because it’s much easier to get approved for a secured card than an unsecured one. In some cases, a secured card may be the only option for someone with poor credit, as it may be impossible to successfully apply for other types of credit lines.
Unsecured credit cards
Unsecured credit cards aren’t backed by a deposit, and the credit card limit will be determined instead by your credit history and credit report details. These types of cards generally require a fair to good credit score, from about 580 to 740, for approval. Unsecured cards can be one of the best ways to build credit because they offer much higher spending limits and better rewards than a secured card.
Paying off recurring bills every month, such as utility or mobile phone bills, can be a great use of this type of card. You need to pay these bills anyway, and using your credit card allows you to show lenders that you’re responsible and capable of paying down your credit card balance promptly.
If you have the option, look for cards with rewards or cash-back programs. Earning one to three percent off each purchase may seem trivial, but it adds up over time. Research the best cash-back credit cards for your credit score before applying to be sure you're making the most of each line of credit you have.
How does credit reporting work?
Each time you use a credit card, that transaction is reported to at least one of the three major credit bureaus: Experian, Equifax and TransUnion. Your credit card purchase, payment history and overall credit usage behavior are then used to calculate your credit score, which is a three-digit number that reflects your borrowing history.
Credit scores range from 300 to 850, and the higher your score, the better your credit history is perceived by lenders. Credit reporting agencies adjust your credit score up or down over time 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 delinquent monthly payments.
How to build credit fast with a credit card
Whether you’re trying to repair poor credit or are building your credit history from scratch, there are well-defined ways to improve your credit score effectively and efficiently. While they may all take time, they are basically foolproof and guaranteed to provide positive results.
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 in some ways as that of building and maintaining a good credit history.
Keep a low credit utilization ratio
Your credit utilization is typically expressed as the percentage of your available credit line you’re using. For instance, if you had a credit card with a $10,000 credit limit and had $5,000 of credit card debt, you would have a credit utilization of 50%.
It’s essential to keep this ratio low, as it has a significant impact on your credit score. It’s also good to know that too little credit utilization can negatively impact your score as well, but not as severely as carrying too much debt.
A good rule of thumb is to keep your credit utilization ratio right around 30% for the best effect on your credit score. If your utilization is significantly higher than that, paying off your credit card to bring your utilization under that target is a worthy goal.
If you do carry a significant amount of credit card debt, looking into the best balance transfer credit cards may be a strategy for helping you temporarily lower your interest rate while you pay that debt off. There are several benefits to transferring your debt from a high interest rate card to one with a lower interest rate or an introductory rate of 0% for a period of one year to 18 months. By lowering your interest rate, you'll lower the cost of the debt over time and can therefore pay it off faster. It will also increase your available credit, reducing your credit card utilization in the process, provided you don’t close the existing account.
Always make on-time payments
While there are several schools of thought about the best way to pay off credit card debt, you want to ensure that you 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 credit. Delinquent payments negatively impact your credit score, incur additional fees and may cause the issuing bank to change your interest rates or lower your credit limit.
Limit your credit inquiries
A surprisingly persistent credit score myth is that there’s no harm in applying for additional credit cards or things such as auto loans. Each time you do, a lending institution files a credit check or inquiry with credit reporting bureaus, and they do have an effect on your score.
Credit inquiries happen whenever lenders request your credit report during the process of considering you for a loan or other type of credit. Too many inquiries in a short period of time can harm your credit score, so it’s best to limit the number of hard inquiries made against your credit report by restricting the number of applications you make for things such as credit cards or loans.
Remove as many negative items as possible from your credit report
Negative items — such as missed or late payments, unpaid debts or debts that have been handed over to collection agencies — can all have a negative impact on your credit score. So can things like having filed for bankruptcy within the past seven years, being in default on a mortgage or having a large amount of student loan debt.
Occasionally, these negative marks remain on your credit report in error or longer than they should. Credit reporting agencies can be convinced to remove these things from your credit history, and there is an easy (though time-consuming) process to dispute inaccuracies on your credit report.
If there are charges or debts that you didn’t make, contact your credit card companies, banks and the credit reporting agency as soon as possible. It’s important to dispute any credit report errors in writing and remove as many negative items as possible.
How to build credit with a credit card FAQ
What helps build credit?
How long does it take to build credit?
The length of time it takes to build credit varies depending on your credit card use and other factors, such as whether you're repairing poor credit or establishing a credit history for the first time.
Credit card usage can also affect the amount of time it takes. If you seldom use your credit card, you create less data for credit reporting bureaus to evaluate. Using your card often, provided you keep your total credit utilization under recommended ratios, can cause your credit score to change more rapidly.
Responsibly handling your credit card debt will cause gradual improvements, with some credit reporting apps updating scores several times a week. Over time, you should see a marked improvement in your credit score. Again, being patient and consistent in your efforts to build your credit is essential.
What is the best credit card to build credit?
The best credit card for building credit or repairing a low credit score will depend on your situation. Carefully review credit card offers, especially interest rates for purchases, cash advances and any promotional rates subject to change.
You'll also want to understand policies and fees for late or missed payments, exceeding credit limits or other factors that could affect the amount you're expected to pay each month. Generally speaking, it's best to avoid credit cards with high interest rates and membership or maintenance fees.
If you're already carrying some credit card debt, finding a card with a lower interest rate or a balance transfer offer can be an effective strategy for paying off that debt and building your credit. Lower interest rates can save you money over time and help you to pay your debt off faster, which will cause your credit score to increase.
For those with poor or no credit, a secured card with a limit determined by deposit may be the best way to build credit. It can allow you to demonstrate responsible credit card usage without the need for a stringent approval process. Bear in mind that most secured credit cards also charge monthly or annual membership fees, so be sure the expense is both affordable and provides sufficient benefit.
Can applying for credit cards actually hurt your credit score?
While having too many credit cards won't necessarily harm your credit score, applying for too many can have a negative effect. Each time you apply for a credit card, the lender makes a "hard inquiry" or requests a copy of your credit history from one of the credit reporting agencies with the indication that they're evaluating your creditworthiness.
Even if you're approved for a credit card, loan or other financial product, the hard inquiry still appears on your credit report. Too many hard inquiries, especially over a short period of time, can be interpreted as a sign of financial difficulties, causing banks to be more cautious about approving loans or credit applications.
In many situations, it's better to ask your existing credit card provider for a credit limit increase than to apply for additional lines of credit. Limiting the number of credit card applications you make may not directly improve your credit score, but too many inquiries can have a negative impact.