How to build credit with a credit card
Having a strong credit score is important for a lot of reasons. Strong credit makes it easier to get approved for loans and credit cards. It can also make you eligible for better interest rates or credit card offers when you borrow funds. Not to mention, if you’re looking to rent or buy a house, your credit score will likely come into play as an indicator of your ability to handle payments.
One of the ways you can build up your credit score is through the responsible use of a credit card. There are credit cards available for a variety of needs and all ranges of credit scores. Keep reading to learn how to use a credit card to build up your credit score.
Here’s how to build credit with a credit card
- Understand the five credit score factors
- Know your current credit score
- Choose a credit card that best meets your needs
- Create a plan for making payments
- Think long term
Understand the five credit score factors
New credit (10 percent): This is triggered each time you apply for new credit. You should keep it in mind for each new credit application you make. Multiple credit applications in a short period of time can cause your credit score to decrease.
Credit mix (10 percent): Credit mix has to do with the different kinds of credit that show up on your credit report, such as loans, mortgages, and credit cards. If the only thing you have on your credit report are credit cards, a variety of different types of cards could help with this factor.
Credit history (15 percent): This is related to the longevity of your credit accounts. When you open a new credit card, the issuer is hoping that you will maintain it for a long period of time. When you maintain accounts over time, you are showing that you can be consistently responsible with managing debt. This creates a strong credit history and helps your credit score remain stable. By contrast, when you close a credit card, that credit history is erased and your average credit history becomes shorter. This can have a negative effect on your credit score, especially if you close an older credit card.
Credit utilization (30 percent): Credit utilization has to do with the amount of credit you have versus the amount of credit you use. It is recommended that you keep your credit utilization between 10 and 30 percent of your total available credit. Maintaining a credit utilization within this range can help develop a strong credit score.
Payment history (35 percent): This factor makes up the majority of your credit score calculation. When you make on-time payments on your credit card for at least the minimum amount, you create a strong payment history. By contrast, missing a payment or paying less than the minimum payment can cause your credit score to decrease. It could also leave a mark on your credit report that can last for up to seven years.
Know your current credit score
Working on building your credit score with a credit card means you need to know where your credit stands to begin with. You are entitled to request a free credit report once a year from each of the three credit bureaus. This report will outline your current accounts, how you fair with the five factors and your current credit score.
Knowing your credit score will also give you an idea of what credit cards you’re eligible for, which improves your chances of an approved application. It will also help you avoid having to submit multiple credit card applications, which can have a negative impact on your credit score.
Most unsecured cards are looking for credit scores in the good to excellent range (670 – 850). If you’re just getting started with credit, or your credit score is low, consider applying for a secured card to help build your score up before applying for an unsecured card.
Choose a credit card that best meets your needs
When looking for a credit card, it’s easy to get drawn in by a great welcome offer or generous rewards structure. While those can be important factors in choosing a credit card, there are other features you want to consider to make sure you are making the best choice.
Once you’ve found a card that fits your credit score range, take a look to see if the card has an annual fee and what your ongoing interest rates will be. For an annual fee, it’s important to make sure that the fee is balanced out with the value you’ll receive from the card, whether that be cash back or rewards points.
Your purchase APR is an important factor to understand how much each purchase on your credit card will actually cost you. This is especially important if you plan on carrying a balance on your credit card or transferring a balance from an existing credit card. Choosing the best credit card for your credit score, budget, and spending habits will set you up for a better chance of approval and for being able to keep up with your payments.
Create a plan for making payments
Keeping up with your credit card payments is one of the most important factors in building your credit score. Having a strategy for doing that will make using and maintaining your credit card so much easier. If your issuer allows for it, set up automatic payments so that you won’t have to think about whether you’ve paid your bill or not. You can also request notifications for upcoming payment due dates to keep yourself in the know.
Making payments also involves planning your spending. It’s important to include your credit card purchases in your budget so that you know how much you can afford to spend each month. It’s preferable to budget so that you can pay your bill in full each month, instead of just paying the minimum payment. Paying in full helps you keep your credit utilization in a healthy range, which keeps your credit score strong. It also helps you to avoid having to deal with added interest on your purchases, saving you money in the long term.
Think long term
A strong credit score is the result of responsible use of credit over time. That includes paying your bills every month, keeping your credit utilization in check, maintaining your credit accounts, and not applying for multiple credit cards in a short amount of time. How long it takes to build your credit score will depend on where you are starting. You could be looking at a few months to raise your score, or you could be looking at a few years.
There is no quick fix for increasing your credit score. However, you can drastically lower the credit score you’ve worked to build with just one 30-day delinquency. According to a myFICO report, this can cause your score to go down by as much as 83 points. So, it’s important to use your credit card in a way that you can repay and to make sure you don’t apply for more cards than you can handle. Look at your credit card as a long term investment in your financial growth. You don’t have to do a lot at once. Having credit cards that you use responsibly can be your ticket to a strong credit report and credit score.