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- To build good credit with a credit card, you need to be spending less than your credit limit allows.
- If you've never had a credit card before, consider applying for a secured credit card.
- Your card payments and credit utilization will ultimately impact your credit score.
Choosing the Right Credit Card for Building Credit
Building credit from scratch can seem intimidating, but all it really takes is time, smart habits, and strategic credit card use. Selecting the right card for you is the first step in building your credit, and improving your credit score with credit card payments. Look for cards that report to all three major credit bureaus, offer low fees, and perhaps even reward you for responsible use. Secured credit cards are a great starting point for those with no credit or bad credit, as they require a security deposit that typically serves as your credit limit, minimizing the lender's risk.
Understanding How Credit Scores Work
The Role of Credit Utilization
Credit utilization — the ratio of your credit card balance to your credit limit — plays a significant role in your credit score. Keeping your utilization below 30% is recommended for showing lenders you can manage your credit responsibly.
The Importance of Payment History
Your payment history is the most critical factor in your credit score. Late payments can significantly harm your credit score, so it's essential to make at the minimum payment on time every month.
Strategies for Building Credit
Making Small, Manageable Purchases
Use your credit card for small purchases that you can afford to pay off in full each month. This strategy will demonstrate responsible credit use without accruing interest charges.
Paying Your Bill On Time and In Full
Paying your bill in full each month is the best way to avoid interest charges and will help you build a positive payment history. This will ultimately boost your score over time.
Increasing Your Credit Line
As your creditworthiness improves, requesting a higher credit limit can further lower your credit utilization ratio, provided your spending doesn't increase in tandem.
Monitoring Your Credit
Regularly checking your credit report and score can help you understand the impact your card use on your overall credit health. Many card issuers offer free credit score access to their customers. Monitoring your credit can also help you catch and dispute any inaccuracies or fraudulent activity early on.
Avoiding Common Credit Card Pitfalls
Avoiding Late Payments
Late payments can severely impact your credit score. Setting up automatic payments or calendar reminders can help ensure you never miss a due date.
Resisting the Urge to Overspend
Just because you have a credit limit doesn't mean you should use it all. Overspending can lead to debt accumulation and high credit utilization, both of which can hurt your credit score.
FAQs
Can I build credit with a credit card even if I don't carry a balance?
Yes, you can build credit by using your card for purchases and paying off the balance in full each month. Carrying a balance is not required to improve your credit score.
How long does it take to build credit with a credit card?
Building credit is a gradual process that can take several months to a few years, depending on your starting point and how diligently you manage your credit card and other debts.
What should I do if I can't get approved for a traditional credit card?
Consider applying for a secured credit card. These cards require a deposit that becomes your credit limit, and are designed to help build or rebuild credit.
Is it better to have multiple credit cards when building credit?
While having more than one credit card can improve your credit mix and provide more opportunities to build credit, it's essential to manage them responsibly. Mismanaging multiple accounts can do more harm than good.
What's the difference between a secured and an unsecured credit card?
A secured credit card requires a cash deposit that serves as collateral and usually equals your credit limit. An unsecured card doesn't require a deposit and is issued based on your creditworthiness.
Tanza is a CFP® professional and former correspondent for Personal Finance Insider. She broke down personal finance news and wrote about taxes, investing, retirement, wealth building, and debt management. She helmed a biweekly newsletter and a column answering reader questions about money. Tanza is the author of two ebooks, A Guide to Financial Planners and "The One-Month Plan to Master your Money." In 2020, Tanza was the editorial lead on Master Your Money, a yearlong original series providing financial tools, advice, and inspiration to millennials. Tanza joined Business Insider in June 2015 and is an alumna of Elon University, where she studied journalism and Italian. She is based in Los Angeles.
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