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How To Use A Credit Card To Build Credit

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One of the fastest, most efficient ways to build and improve your credit score is to use your first credit card(s) properly, regularly, and responsibly. That means making your payments on time and, if you can do it, in full. And that means staying as far away as possible from your card’s credit limit despite using the card consistently.

Do all that, and your credit score and your finances in general will grow into the healthy state you want to take with you into your future. Even when you’re starting from scratch.

How To Start Building Credit with a Credit Card

To build credit with a credit card, you need to actually have a credit card. Trouble is, credit card companies prefer it when their new customers come to them with established positive credit histories. Why? Because it gives the company some confidence that their new cardholders will make good on their payments.

And if you’re reading this, there’s a decent chance you aren’t that kind of new customer.

The good news: It isn’t quite the “Catch-22” it might seem on first blush. You can be approved for a first credit card even if you don’t have a credit history, and sometimes even if you have an established credit score that’s a few miles south of where you’d like it to be.

The not-so-good news: Things like travel miles, big cash back on purchases, gift cards, redemption points aren’t likely to be available with your first card. You might find some early cards that offer smaller rewards, but the big benefits will come later, once you’ve proven your creditworthiness.

So, think of your first card as a building block, the infrastructure on which your future credit can stand firm and proud and be rewarding. That’s always a very good place to start.

Here, then, are ways you can lay the foundation and begin to construct the kind of credit score that will amount to a hill of beans in this crazy world.

Secured Credit Cards

A credit card is “secured” when the cardholder puts down a deposit to get it. In other words, it’ll cost you something up front – anywhere from $200 to $2,500 depending on how high you’d like your credit limit to be. If you want a $1,000 credit limit, you’ll have to give the card company $1,000 deposit up front to get it.

The deposit makes the card easier to obtain for people with no credit history or even a spotty credit past because it protects the company issuing the card. If you don’t pay the bill, the issuer gets to keep your deposit.

If you find the right secured credit card and consistently pay your bill on time, your credit score will grow. So, which is the ‘right’ secured card? It’s one with no annual fee from a company that regularly reports your account activity to the three major credit bureaus: TransUnion, Experian, and Equifax. The bureaus use those reports to determine your credit score. Once your credit score is healthy enough, you can move up to an unsecured card and get your original security deposit back.

Student Credit Cards

Like with the “right” secured card, a student credit card can build and improve your credit score. When you make your student card payments on time, you’re showing future lenders that you can be trusted with their money. But unlike a secured card, a student card usually doesn’t require a security deposit. That generally means a student card will come with a lower credit limit than other cards, though your limit can expand as you reliably meet your payment obligations over time.

The catch? Well, for starters, you have to be a student (D’oh!) in college or graduate school and be at least 18 years old. If you’re under 21, you’ll probably have to find a cosigner or show some evidence that your independent income is enough to make the payments. And one more thing: The lower your grades, the less generous the card issuer is likely to be with whatever rewards are available.

Store Credit Cards

Almost every major retailer such as Target, Walmart, Nordstrom, Lowe’s, even (or especially) Amazon offers its own credit cards that can be used for purchases at their stores or websites. Truth is, they’re generally easier to get than other cards. That’s a plus if you’re just starting down the credit-building road. As with the other types of cards we’ve discussed, the stores report your payment history to the credit bureaus. Assuming you’ve been dependable at repaying debts, that’s good for your credit score.

Store cards often come with perks such as discounts and free shipping, but they also often come with low credit limits and high interest rates that can get you in trouble. Be careful how you use them.

Become An Authorized User

The major credit card companies don’t always treat applications kindly. You could have trouble getting approved. If that’s the case, another way to build credit from scratch is to keep your starter effort “all in the family.”

A parent, a sibling or in-law, for example, who wants to help you get started might agree to add you to one of his or her cards as an authorized user. You get to use the card and attach your name to the primary cardholder’s credit reports, which means you enjoy the credit score benefits of the strong record of timely payments your parent (or in-law or trusted sibling or close friend) has already established.

Of course, you’ll want to make sure you hold up your end of the deal by paying for anything you buy with your family member’s credit card. If you don’t, that can create some friction.

Best Ways To Use a Credit Card to Build Credit

As beneficial as a credit card can be in your effort to build your credit score, it can also do boatloads of harm to your financial future when it isn’t used wisely. A credit card gives you buy now/pay later privileges that can bite you on the backside if you over-emphasize the “buy now” piece of that bargain and ignore the ‘pay later’ part.

In other words, handle your new card with care.

Let’s take a more detailed look at some of the best practices to employ with your brand-spankin’ new credit card.

1. Always Pay On Time

Sorry about this, but we’re going to have to spend a quick moment with some math here. It involves your FICO score, which is the number used to determine your creditworthiness.

Your payment history accounts for 35% of your FICO score, making it the most significant factor in the FICO equation that allows lenders to estimate your ability to repay what you’re asking to borrow from them.

The FICO scoring model assigns consumers (that’s you) a number between 300 and 850. The higher the number, the better. So, 35% of the maximum credit score of 850 is 297.5. That’s how much your credit score can be helped by regularly paying your credit card bills on time. Pay them late or not at all, though, and your credit card company starts sending those negative reports about your account activity to the credit bureaus. Down goes your FICO score.

2. Keep Your Credit Utilization Low

Ugh. More math, along with a cumbersome definition. Your credit utilization is the percentage of your total available credit you’re using at any given time. Say your first credit card has a limit of $1,000, and you’ve charged $250 on it and haven’t paid that bill yet. You’ve used 1/4th of your available credit, which means your credit utilization ratio is 25%.

In that scenario, you’re good. To keep your credit score healthy, your credit utilization ratio should be at 30% or less. The lower the better. A number below 30% is a good indicator that you can afford to make your payments.

So how does your credit utilization figure into your FICO score? It counts for 30% of it, making it the second most important factor behind your payment history.

If all of this math is making your head spin, think of it this way: Just make sure you aren’t spending close to your credit limit even if you have every intention of paying the bill every month.

3. Limit New Credit Applications

You’ve got that all-important first credit card now. Great!  Is it time to go after Credit Card No. 2, No. 3, No. 4 and beyond? Should you apply for a car loan, too? Perhaps throw in a personal loan application to take care of some medical bills?

The answer is: Not so fast. These new financial obligations should be undertaken in moderation.

Every time you apply for new credit, a credit check called a ‘hard inquiry’ is performed. That means the organization from which you’re attempting to get new credit looks at your credit file to see your track record as a borrower. Every time it happens, it shows up on your credit report and stays there for two years. If your report includes a bunch of hard inquiries in a short amount of time, it might look to lenders as if you’re in danger of over-extending yourself financially. Your credit score can take a five-to-10-point hit with each hard inquiry.

While you shouldn’t be afraid to add on to your credit obligations, you should do so sparingly and space them out over time.

4. Use Your Credit Card Regularly

OK, this might be confusing. We’ve told you to stay as far away from your credit limit (your credit utilization) as possible. And we’ve told you not to start applying for new credit sources willy-nilly. Now we’re telling you to run up charges on your card repeatedly if you want to build credit. Does that add up?

Well, yes. Building credit is a balancing act between being active with your card and being able to pay off the charges you accrue with that activity. Those people who compute your credit score like to see you develop a history of making payments on time. The only way to do that is to have payments to make. The best approach? Make small purchases regularly, the kind you know you can afford to pay off at the end of the month.

5. Keep Your Accounts Open

We have to go back to the FICO score percentage structure for this one. The length of time your credit account (or accounts) has been open makes up another 15% of your FICO score. So even if you aren’t using that first credit card very often, your score benefits from each passing month the credit bureaus see it as active in your file. It might not make sense to shut the account down, especially if you aren’t paying an annual fee for the card.

Part of FICO’s scoring structure is the average age of your accounts. Every time you take on a new one, that average age goes down. This is another reason to avoid making a lot of new credit applications in a short period of time.

6. Treat Your Credit Card Like A Debit Card

What’s the difference, you might ask, between a credit card and a debit card? When you use a credit card, you’re dipping into your line of credit and won’t be expected to pay the bill until some later date. When you use a debit card, you’re dipping into your checking account and the money disappears from it almost immediately. With a debit card, you can see right away what sort of damage you’re doing to your finances.

If you keep track of how much you’ve spent with each credit card transaction as if that money had already come out of your checking account, you won’t be surprised by the size of the bill at the end of the month. You’ll find it much easier to stay within your means.

Setting a budget and sticking to it will help you do that. You’ll have planned for every expense and you’ll know every source of income on a monthly basis. Whenever you’re tempted to reach for your credit card, your budget will tell you how much you can afford to charge on it. That way, you might never have to confess to being a shopaholic.

Speak to a Credit Counselor About Using a Credit Card To Build Credit

If this feels overwhelming, you should know you don’t have to do this alone. There is nothing wrong with asking for expert advice about the best ways to use a credit card to begin to build your credit. There is help available from professionals at nonprofit credit counseling agencies, and it’s free of charge.

Credit counseling will help you review all your options by walking you through the ins-and-outs of different credit card options and how they can impact your credit score.  A counselor will tailor his or her advice to fit your unique financial circumstances and suggest credit solutions even if those circumstances include bad credit history and/or debt.

Bottom line: Don’t be afraid to call a nonprofit credit counseling agency to initiate the conversation. It can be the beginning of a beautiful friendship between you and your credit, soon and for the rest of your life.

You won’t regret it.

About The Author

Michael Knisley

Michael Knisley was an assistant professor on the faculty at the prestigious University of Missouri School of Journalism and has more than 40 years of experience editing and writing about business, sports and the spectrum of issues affecting consumers and fans. During his career, Michael has won awards from the New York Press Club, the Online News Association, the Military Reporters and Editors Association, the Associated Press Sports Editors and the Sports Emmys.


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