Using Credit Card to Build Credit: Why And How To Do It

Using a credit card responsibly is a smart and effective strategy for building credit. By doing so, you can establish a positive credit history, improve your credit score, and prepare for future financial opportunities. In this article, we will explore why using a credit card to build credit is practical and provide effective tips on how to do it successfully.

Is It Good To Use Credit Cards To Build Credit?

When used correctly, a credit card can be an effective tool to help you build credit. To see the best results, use a credit card often and make your payments on time while keeping your balance below 30% of your credit limit.

Using a credit card to build credit can be a smart move toward establishing a positive credit history and improving your credit score. By making timely payments and managing the account responsibly, a credit card can help build a solid credit history. Obtaining credit is essential for building your credit profile, and opening a credit card account is a great way to do that.

How To Use a Credit Card To Increase Your Credit Score

Read on to learn how to effectively use a credit card to build credit.

Don't Sign Up For The First Card You Find

It's important not to rush into signing up for the first credit card you see. Instead, take your time to find one that suits you well. Instead of prioritizing rewards and perks, look for one with lower interest rates, minimal fees, or flexible payment options. This way, you can avoid unnecessary stress and make the most of your credit card.

Keep New Applications To A Minimum

Keeping new credit applications to a minimum is crucial, as it accounts for 15% of your overall FICO® Score. Each new application generates a hard inquiry on your credit report, which can temporarily lower your score. Therefore, it's best to limit new applications to maintain a good credit profile and avoid unnecessary hits to your score.

Know The Difference Between Secured And Unsecured Credit Cards

Secured cards require a deposit, which also sets your credit limit. Therefore, they are easier to get if you have a low credit score or a lack of extensive credit history. Obtaining a secured credit card is excellent for building or fixing credit. 

By contrast, unsecured cards don't require a deposit and rely on your credit history for approval. While they often come with perks such as rewards, they may be harder to qualify for and can carry higher fees and interest rates. Knowing the differences between secured and unsecured credit cards can help you select the best option based on your financial situation and goals.

Pay Your Bills On Time, Every Time

Paying your bills on time each month is crucial for maintaining a healthy credit history. In fact, it accounts for 35% of your FICO^Ⓡ Score, which is a widely used credit scoring model. By consistently making timely bill payments, you demonstrate your reliability as a borrower and build a positive payment history. 

This, in turn, boosts your credit score and improves your overall creditworthiness. So, whether it's your credit card bills, utility bills, loan payments, or any other financial obligations, paying them on time should be a top priority to ensure a strong credit profile.

Treat the Credit Card Like A Debit Card

Treating a credit card like a debit card is a smart approach to managing your credit responsibly. It involves using the card regularly, but not excessively, and not leaving it dormant. Regular usage is important for building a positive credit history and establishing a track record of responsible borrowing. 

Therefore, it's essential to avoid overspending and only charge what you can afford to repay. Using your credit card like a debit card means tracking your purchases and ensuring you have the funds to cover your credit card balance when the statement is due.

Create A Budget

Creating a budget and sticking to it is crucial, especially with credit card usage. A budget helps you track your income and expenses, ensuring you only spend what you can afford. By setting spending limits and prioritizing your financial goals, you can avoid overspending and accumulating unnecessary credit card debt. Budgeting allows you to make informed decisions, gain financial freedom, and use credit cards responsibly within your means.

Keep Your Credit Utilization Ratio As Low As You Can

Keeping your credit utilization ratio at 30% or lower is important for maintaining a healthy credit profile. This ratio refers to the percentage of your available credit that you are currently using. A lower credit utilization ratio indicates that you effectively manage your credit and do not rely too heavily on borrowed funds. 

For example, if you have a credit card with a $5,000 limit and a $1,500 balance, your credit utilization ratio is 30% ($1,500 divided by $5,000). 

However, if your credit utilization ratio is consistently high, such as 70% or more, it may indicate a reliance on credit and potential financial strain. This can negatively affect your credit score and make accessing new credit or loans harder. To maintain a healthy credit utilization ratio, it's important to regularly monitor your credit card balances, pay off outstanding debts, and avoid maxing out your available credit lines.

Increase Your Credit Limit

A higher limit on your credit card can offer you more flexibility in your spending without raising your credit utilization ratio, which plays a big role in determining your credit score. While having a higher limit can be beneficial, it's essential to use this extra credit responsibly and not overspend just because you have more available credit. 

You can request a credit limit increase from your credit card issuer by contacting them by phone or their only platform. However, it's essential to do so judiciously. Consider asking for a higher limit if you've consistently used your credit responsibly and paid your bills on time. However, avoid requesting an increase if you're struggling with debt or have a history of late payments, as this could worsen your financial situation.

Pay the Balance In Full Every Month

Paying your balance in full monthly is crucial to avoid accumulating interest charges on your credit card. When you carry a balance, interest accrues on the remaining amount, increasing what you owe. By paying your balance in full before the end of the billing cycle, you can avoid interest charges and save money in the long run. 

Most credit cards offer a grace period, which is the time between the end of the billing cycle and the due date for your payment. You can pay off your balance without incurring interest charges during this period, provided you've paid the previous month's balance in full.

Monitor Your Credit Report And Credit Score

Monitoring your credit report and score regularly is important to stay informed about your current credit position. AnnualCreditReport.com allows you to check your credit report for free once a year from each of the three major credit bureaus: Equifax®, Experian™ and TransUnion ®. Reviewing your credit report allows you to check for errors and fraudulent activity that could negatively impact your credit history. 

A credit score typically ranges from 300 to 850 and reflects your creditworthiness. A higher credit score indicates better financial management and can result in lower interest rates and more favorable loan terms. Monitoring your credit report and score at least once a year allows you to identify and address any issues early.

Keep Your Accounts Open

Keeping credit accounts open helps build a strong credit history. Closing accounts frequently can shorten your credit history, potentially lowering your credit score. By maintaining open accounts, even if you don’t use them often, you demonstrate responsible credit management and improve your credit profile over time.

Consider Becoming an Authorized User Instead

Becoming an authorized user on a credit card can be beneficial if you're looking to boost your credit score quickly. As an authorized user, you have permission to use someone else's credit card account, such as a parent, relative, or close friend. 

Their positive credit history can improve your own credit score quickly, but it is critical to use the credit card responsibly. Becoming an authorized user may be particularly useful if you have a limited credit history or a low credit score and can't currently qualify for a credit card on your own.

How Long Does It Take To Build Credit With A Credit Card?

The time it takes to see significant improvements in your credit score when building credit with a credit card varies. Generally, you may see some positive changes within a few months of consistent, responsible credit card usage. This includes making on-time payments, keeping your credit utilization low, and managing your accounts wisely.

Credit card activity is typically reported to the credit bureaus monthly, so your behavior within each billing cycle can influence your credit score. However, building credit is a gradual process, and significant improvements may take several months or even years, depending on various factors such as your credit history and the specifics of your credit usage.

Can You Build Credit Without A Credit Card?

You can build credit without a credit card in various ways. Credit bureaus calculate your credit score based on different types of credit accounts, not just credit cards. Building credit can also involve managing other types of loans, such as student loans, auto loans, or personal loans. Also, credit-building tools, such as Experian Boost, allow you to add utility and telecom bill payments to your credit report to increase your score.

The Bottom Line: Be Strategic About Using Credit Cards To Build Credit

Be strategic when using credit cards to build credit. Focus on responsible spending, timely payments and keeping your credit utilization low. You can gradually improve your credit score and achieve your financial goals by using credit wisely.

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