One simple way to build credit is by using a credit card. This is an effective method for building credit since most credit cards don’t have annual fees, are often protected from fraudulent use, and many offer various rewards and perks. But there’s a right way and a wrong way to use credit cards to build credit. In this article, we share some smart strategies to help you increase your score responsibly.
You might be surprised by how often your credit score is looked at. A credit score is considered for getting a mortgage or auto loan, renting an apartment, establishing a cell phone plan, getting lower insurance coverage, and more. Having poor credit or no credit could cost you to miss out on that future home you want or, in some states, even landing that job you want.
One simple way to build credit is by using a credit card. If done responsibly, this is an effective method for building credit since most credit cards don’t have annual fees, are often protected from fraudulent use, and can offer various rewards and perks.
But there’s a right way and a wrong way to use credit cards to build credit. Here are some smart strategies to help you increase your score responsibly:
Use Less Than 30% of Your Credit Limit
Part of your FICO score takes into account what is called your “credit utilization.” This is the percentage of available credit that you have remaining after your charges. One important point to keep in mind is that this 30% is before you make your payment. So even if you pay off your credit card in full each month, you still only want to charge under 30% of your credit limit.
Pay by the Due Date
35% of your FICO score takes into account whether or not you pay your bills on time. Late payments can remain on a credit report for up to 7 years. At the very least, pay the minimum balance on your card, but ideally, you want to shoot for paying the entire balance to avoid having to pay interest.
Use Your Credit Card to Pay Bills
One effective strategy for building credit with your credit card is to pay your regular bills using that card. For example, you can set up automatic payments to pay your utility bills using your credit card. Using your credit card only to pay bills may reduce the likelihood that you’ll swipe away on a shopping spree and overcharge your card.
But remember, charging over 30% of your credit limit hurts your score, so make sure that the bills you charge do not exceed that 30%.
Keep Your Credit Card Account Open
15% of your FICO score accounts for the length of your credit history. The credit history is the average amount of time each of your accounts has been open. This is another reason for why you also want to avoid opening a bunch of new credit accounts; every time you open a new account, it brings down your credit history since it lowers the average amount all of your accounts have been open. To maintain a long credit history, keep your credit card open and avoid closing the account, even if you don’t use the card anymore.
Pay Your Full Balance
While it might be tempting to only pay part of your balance and have some extra cash on hand, try to resist the urge. Instead, pay off your bill in full each month. This can help you avoid having to pay interest and keeps your credit card from getting out of hand.
Instead, think of your credit card like a debit card, only spending money that you already have. Set aside money in your checking account to pay off your credit card balance. Budgeting is one effective method to help make sure you keep this under control. Software programs such as YNAB can help you with this because it deducts credit card purchases from your budget.
Find the Right Credit Card
When selecting your credit card, make sure you pay attention to the details to find the right one for you. For example, while it might be fun to have a credit card at your favorite store, keep in mind that store credit cards tend to have higher interest rates. It is also more beneficial to have one card that can be used at multiple places, rather than just one store. Pay attention to details such as interest rate, earning rewards (and the expiration date on the rewards), balance transfers, and APR.
While it might be tempting to sign up for multiple cards, especially when they offer various perks for signing up, resist the urge. Multiple card checks could ding your credit. Also, opening multiple new accounts at once can ding your credit score by up to 10%. Instead, research to find the card that you feel is best for you and stick with that one.
Secured Credit Cards
If you are struggling to apply for a regular credit card, you can start with a secured credit card. With these cards, you make a deposit & that deposit becomes your credit limit. Take some time to research the secured credit card; you want one that reports your payment history to one of the major credit bureaus. A consistent history of paying to your secured credit card ups the odds of you being approved for a regular credit card.
Final Thoughts
While credit cards are an incredibly effective way to help build some credit, you’ll want to exercise caution. It can be tempting to spend money that you don’t necessarily have. Set simple parameters for yourself to help you keep your charges under control and stick to those as much as possible.
Resources:
1. https://wallethub.com/edu/cc/how-to-build-credit-with-a-credit-card/50876/
2. https://www.nerdwallet.com/blog/credit-cards/credit-card-raise-credit-score/
3. https://www.creditcardinsider.com/learn/definitive-guide-how-to-build-credit-with-credit-cards/
4. https://www.thebalance.com/credit-card-build-credit-2385756
5. https://www.experian.com/blogs/ask-experian/how-to-use-a-credit-card-to-build-credit/
