When you think about credit cards, what comes to your mind?
Is it the extra spending flexibility?
The opportunity to earn rewards?
Or the convenience?
But did you know that with the right knowledge credit cards can become insanely powerful tools you can use to buy and acquire things people only dream of?
First of all using a credit card responsibly can open up opportunities for building or rebuilding credit.
Here’s why this is so important:
The better your credit, the more likely you are to qualify for loans and other types of credit.
It opens opportunities to find a better new home or car.
So, how do you use a credit card to build credit?
With my 25 years of experience as a financial coach and banking expert, you’ll learn below how to responsibly use your credit card, like paying bills on time and lowering your credit utilization, so you can improve your credit and buy the things you want to buy.
Here’s what you need to do:
9 Ways To Build Credit With A Credit Card
Credit cards can help improve your credit since credit card issuers report your account and activity to the national credit bureaus: Experian, TransUnion, and Equifax.
Credit bureaus then create credit reports based on the information gathered. Credit scoring companies will then use these credit reports to calculate your credit score.
If you want to build credit with a card, start by opening your own credit card account or becoming an authorized user on someone else’s credit card.
Fortunately, there are still other options:
Secured Credit Cards
If you want to build credit with a credit card, consider opening a secured credit card.
Secured credit cards are usually the first step if you’re starting your credit-rebuilding journey.
Secured credit cards work similarly to normal credit cards; however, you must send the card issuer a refundable security deposit (usually equal to the credit limit you’ll receive) when you open your account.
Keep in mind that secured cards might have higher fees and don’t necessarily offer cardholder benefits. But it can help you qualify for better credit cards in the long run.
Opening a secured credit card also lowers the risk involved for potential lenders or credit card issuers.
Authorized User Status
Another way to use credit cards to rebuild credit is by using the authorized user method.
In this method, you won’t have to open your own card. Instead, you’ll ask a trusted person to add you as an authorized user to their existing credit card account.
Many credit card companies will update your accounts monthly with the credit bureaus for the primary cardholders and authorized users.
If you want to learn more about when credit scores and credit reports update, you must check out my recently written article about how often credit scores update.
Paying your bills on time consistently and lowering your utilization will reflect on your credit report and your credit score.
Remember that if the primary owner of the card has an irresponsible spending habit, it can also negatively affect your credit.
Student Card
You can choose student credit cards if you’re still in college or a recent graduate.
Even though student cards generally have low credit limits, they usually have features designed for a student’s lifestyle, such as rewards for entertainment, various streaming services, food delivery services, or travel services.
Student cards are a great first option for students since they usually have lenient requirements for applicants who don’t have credit yet.
Consistently Pay Your Bills On Time
Consistently paying your bills on time is the most important factor in building good credit.
Lenders use the FICO score as one of the most used credit scoring models. Here’s a quick look at the factors that determine your credit score:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit (10%)
As you can see above, payment history accounts for 35% of your credit score. Failure to pay your bills on time can damage your credit significantly.
It’s best advised to pay off your credit card in full since it allows you to avoid interest charges through a grace period.
However, it’s not a problem if you can’t pay in full as long as you make at least the minimum payment due. This prevents the card issuer from reporting late payments to the bureaus.
Consistently paying your bills on time shows you’re responsible enough to manage your finances.
If you’re having trouble paying your debts on time, consider installing AutoPay or creating calendar reminders to avoid missing payments.
Monitor Your Credit Report
Did you know that errors on your credit report can cause your credit scores to drop?
That’s why it’s also important to monitor your credit report.
Check for inaccuracies or signs of fraud and report it to the credit bureaus immediately.
Check out AnnualCreditReport.com to get free copies of your credit reports.
On the other hand, if you want to keep track of your credit scores, you can check them on your credit card or loan statement, choose free credit scoring sites, or purchase them directly from major credit bureaus like FICO and VantageScore.
Maintain a Low Utilization Rate
A good rule of thumb is to keep your credit utilization at 30% or lower.
The utilization ratio is how much of your credit limit you’re using.
For example, if you have a credit card limit of $3,000 and spend $1,800 this month, your credit card issuer will report that to the credit bureaus.
Even though you’ll be paying it all off next week, your credit utilization ratio is still 60%, making it one of the most common mistakes that people make that lowers their credit scores.
Lenders or banks like to see that you have lots of available credit and you’re not spending much of it.
Spending way above your ratio puts you at a high risk of being unable to repay your debt.
Limit your card usage, especially if you have a low credit limit, to maintain a low utilization rate.
Don’t Apply for Too Many New Accounts At Once
Applying for new credit is also a big no-no when building a credit.
Every credit application, issuer, and lender makes a new hard inquiry, temporarily decreasing credit scores. Credit inquiries usually affect your FICO score for up to 12 months.
This means that having too many recent applications damages your credit.
Seeking too much new credit will also show issuers and lenders that you’re too desperate for credit.
Regularly Use The Credit Card
Keeping your utilization low is different from regularly using your credit card.
When regularly using your card, ensure you can afford to pay off all your debts.
Issuers and potential lenders still like to see that you’re using your credit card.
The length of your credit history is also a factor in determining your FICO score, in addition to payment history and amounts owed.
How to Build Credit Without a Credit Card
While opening credit cards can be a good way to improve credit, it’s not your only option.
Loans and other types of credit can also help boost your credit score as they also help report your credit background to the credit bureaus.
If you’re fairly new to the world of finance, you can check out credit-builder loans. As the name suggests, these loans are designed specifically to help improve credit.
Other loans you can choose from are mortgage loans, student loans, and debt consolidation loans, all recommended for individuals who are just starting.
Furthermore, some types of accounts, such as phone plans, internet, and other utilities, often are not reported to the bureaus to help boost credit.
Fortunately, Experian Boost® offers a free feature that lets you add accounts like cable, gas, electricity, water, and even streaming services payments to your Experian credit report.
According to their website, average users receive a reported 13-point increase in their FICO Score.
How To Build Credit With A Credit Card: Summary
When using a credit card to build credit, you first need to choose whether you would like to start on your own personal credit card, use a student card, or become an authorized user on another trusted person’s card.
Responsibly using a credit card is one of the easiest and best ways to build credit.
By responsibly using, you can consistently pay on time, spend a small portion of your credit limit, monitor your credit report, and more.
With healthy and responsible spending habits, you can eventually generate a good or even excellent credit score.
Carelessly using credit cards will damage your credit, as your payment history is one of the biggest factors influencing your credit score.
On the other hand, other ways exist to help build credit without using a credit card.
You can try other types of loans like personal loans, auto loans, or credit-builder loans,
Nowadays, payments for phone bills, utilities, and even streaming services such as Netflix and Disney+ can help build credit by opting for Experian Boost.