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How to Use a Credit Card to Build Credit

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Using a credit card to build credit is one of the fastest and easiest ways to improve your credit score. Responsibly using credit cards allows you to demonstrate to lenders how you manage credit.

If your goal is to build good credit (and avoid bad credit), it’s recommended that you use credit cards and make your payments on time while only using a small portion of the credit card’s credit limit.

It’s important to learn to use credit and show lenders you know how to use it responsibly. 

Before diving in, there are a few things you should understand. After all, you want to make sure you don’t make any costly mistakes.

A great credit score is a great asset and one you have to work to obtain.

Types of Credit Cards That Can Help You Build Credit

One of the first things you need to understand is that there are several types of credit cards you can use to build credit. Here you can learn about each of these and how to use them for the best results.

Secured Credit Cards

If you have new or bad credit, qualifying for a normal unsecured credit card can be tough. That’s why secured credit cards exist.

With secured cards, you must make a security deposit before you are given the card. Usually, this is in the amount of $300-$1,000. (Many secured cards require an annual fee) If you use your card responsibly, it can help you improve your credit.

The security deposit that you make will equal your credit line. That way, if you default on your payments, the credit card company will keep your security deposit to pay off the debt. 

This puts the lender in a low-risk position and allows people with bad or new credit to learn how to responsibly manage a credit card.

It is important to note that applying for a secured credit card may cause a hard inquiry on your credit reports. While this credit check doesn’t have a huge impact, it can cause your score to fall by a few points temporarily. (This is typical of any credit card application, not just with secured credit cards.)

Many secured credit card providers also offer unsecured cards. This means you may be able to graduate to unsecured cards from the same issuer if you responsibly manage your secured card over time. 

However, if this is not the case, you will get your credit up and be in a good position to apply for an unsecured credit card with a different provider. If you close the secured card, you will receive your security deposit back, less any unpaid balance, fees, and interest. 

Although, as you’ll see later, we recommend that you don’t close your credit card accounts!

Accepting secured credit cards and using them responsibly is a solidway to improve your credit. 

Student Credit Cards

Individuals who are enrolled in college may qualify for student credit cards. It’s important to note that some credit card issuers provide better terms for students who make good grades. 

If you are under the age of 21, it is required that you show proof of income to pay your debts. 

This is a requirement established by the Credit CARD Act of 2009. You can fulfill this requirement by getting a part-time job, student loans, parental support, or some other source of income.

In situations where your income isn’t enough to be approved, getting a co-signer is necessary. It’s important to note that only a few credit card providers will allow you to have a cosigner. However, this is another option for building credit.

Become an Authorized User 

If you don’t have good credit, the last option is to become an authorized user on the credit card of a spouse, parent, or another family member. 

What this means is that you become authorized to use someone else’s credit card. 

If this happens, the credit card company will begin reporting the account to the credit bureaus under the primary card holder’s name and the authorized user’s name.

With this option, you receive your own card with the same credit line as the main cardholder. This allows you to make purchases if you have approval from the primary cardholder.

When you have someone else’s credit card reporting on your credit history, it will help you build and improve your credit. Remember that your credit will not be helped if the main cardholder does not make on-time monthly payments or has bad credit.

Things to Do to Build Credit Once You’ve Got a Credit Card

Once you have a credit card, you need to use it responsibly and properly to build your credit. This doesn’t mean going out and charging up to the limit right away.

Instead, use the tips here.

Use Your Credit Card

Once you have a credit card, it’s time to use it.

Buying items and then paying your bill shows the issuer that you will stick to the established deadlines. If you never buy anything, creditors will find it more challenging to figure out how you would act if you did.

While purposefully getting into debt may seem counterintuitive at first, if you use 1-10% of your credit, it will strengthen your credit report more than a zero percent utilization. And more importantly, you need to build a history of on-time monthly payments. 

Because of this, you need to buy something each month and then pay off the charges before the due date. 

You can also use the card for a balance transfer or cash advance. Even if it is just a credit builder card, using it this way will ultimately benefit your credit score.

If the idea of getting into debt to build your credit doesn’t feel right, consider Credit Strong’s credit builder loans. You can build your credit and your savings at the same time! See pricing and plans here.  

Pay Your Bill on Time

Once you have your new credit card in hand, you need to focus on payment history. 35% of your FICO© credit score is based on your payment history alone. So this is hugely important!

Building credit using your credit card account requires you to pay at least the minimum amount due each month.

If you miss the due date set by the credit card company, the issuer may charge you an additional fee, and you may lose promotional or introductory interest rates on your account.

A good way to make sure you don’t miss payments is by setting up autopayments on the account. It is possible to make the minimum payment each month with autopay; then, you can make another payment on the outstanding balance separately.

If you make a late payment, the card issuer will report that your account is late to the major credit bureaus. 

However, this doesn’t typically happen until your bill is 30 days past due. It is best to avoid this situation because late payments result in a negative mark that will cause your credit scores to fall. This mark can remain on your credit report for seven years.

If you believe you’re in danger of missing a payment, ask family for help or take money from your savings account to cover the cost. Even one 30-day late payment can seriously hurt your credit, so be careful!

Maintain a Low Utilization Rate

Credit scoring methods use the credit limit and balance on your card to determine your total credit utilization amount. Therefore, your credit card balance impacts your credit scores. 

The lower your utilization rate is, the better this will be for your credit score.

Limiting your card use, especially if you have a lower credit limit, will help you keep that low utilization rate. Most experts recommend you keep this at 10% or less. 

For example, if your credit card limit is $1,000, and your balance is $70, then your credit utilization ratio is 7%. $70/$1,000 = 7%.

If you do use your card for a large purchase, try to reduce your balance as quickly as you can.

Even though it can be tempting to overspend with your new credit card, avoid carrying high balances.

Treat it Like a Debit Card

One possible danger of credit cards is getting trapped in a cycle of debt. If you carry a high balance and only make the minimum monthly payments, it will take years to pay off your credit card.

If you aren’t careful with what you charge, you may lose track of how much you owe.

It’s smart to keep a budget. This is true regardless of if you are using credit cards or not. By doing this, you will know what you have available to spend. It will also help you keep up with the amount of available credit you have.

When you treat your credit card like a debit card, you will only spend what you know you can fully pay when the bill comes in. As mentioned earlier, you should never spend more than 10% of your balance each month.

Staying focused on spending within your means allows you to avoid paying a higher interest rate and carrying a balance. 

Keep Your Accounts Open

Did you know that length of credit history is another factor that impacts your credit score? The length of your credit history accounts for 15% of your FICO score.

Your “length of credit history” is calculated as the average length of time that each account has been open. The longer this is, the better it is for your credit scores.

The longer you use credit, the more predictable you seem to lenders. Be sure that your credit card accounts always remain active and open.

Each time you open a new credit card or close an old one, it will lower the average age of your accounts. This hurts your credit, so don’t do it!

Another option for increasing the average age of your credit is a Credit Strong account. Some Credit Strong accounts allow you to build up to 120 months of credit history! The accounts also allow you to cancel anytime for free.

Now You Know How to Build Credit with Credit Cards

There are a few things to know when it comes to building credit using credit cards. Be sure to keep the tips and information given here in mind, which will help you see the most credit benefits possible in the shortest amount of time.

There’s no way to build or rebuild credit if you are not actively monitoring your credit and taking steps to improve it. Being informed is the best way to build your credit. 

FAQs

How Much Do You Need to Pay on Your Credit Card to Increase Your Credit Score?

Make sure to keep your credit utilization ratio at most under 30% to avoid hurting your score. Most experts recommend that keeping it under 10% will help you get the best score possible.

Credit utilization’s effect on your credit score is one of the strongest reasons for why you should repay most of your balance each month. 

However, it’s not the only thing to consider. If you maintain a large balance, it will cost you a lot of interest.

Also, many lenders look at the balance on your current credit cards when deciding to approve you for a new credit card. They like seeing that you carry low credit balances. This lending criteria is independent of what you have in your bank account or your credit score.

How Often Do You Need to Use Your Credit Card to Build Your Credit?

You need to build a flawless payment history to build your credit. This means making monthly payments over a long period of time such as two years. 

How often you make credit card purchases doesn’t matter as long as you make on-time payments and don’t keep a high credit card balance. (Since high balances affect your utilization ratio.)

Should You Maintain a Zero Balance on Your Credit Card?

In general, the lower your credit utilization rate is, the better it is for your credit scores. However, credit experts point out that a 1% balance is better than a 0% balance for credit scoring purposes. 

For whatever reason, the FICO credit scoring models reward carrying a tiny balance over having no balance.

CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.

Start Building credit today
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