In today’s financial landscape, your credit score holds the power to make or break your financial health. With the potential to save or cost you hundreds or thousands of dollars in interest, it’s hard to overstate the significance of maintaining a strong credit score.
This guide discusses how to use a credit card to build credit, how to choose the right credit card for your needs, and best practices for using credit responsibly.
What Is a Credit Score and Why Is It Important?
Your credit score is a numerical representation of your creditworthiness. In other words, it measures how likely you are to pay back what you owe.
It’s calculated based on your credit history – including payment history, credit utilization, length of credit history, types of credit accounts, and new credit inquiries.
Lenders, credit card issuers, landlords, and even employers, where allowed, may use your credit score to evaluate your financial health and determine your creditworthiness.
How to Use a Credit Card to Build Credit
By using credit responsibly, you can build a positive credit history that may help you qualify for better rates and terms on loans, mortgages, and credit cards.
When it comes to understanding how to use a credit card to build credit, here are some best practices you can follow to help positively establish your credit score:
1. Make Payments on Time
Making payments on time is one of the most important factors in building a positive credit history. In fact, payment history accounts for 35% of your total FICO® Score.
Consistently making payments on time can demonstrate to lenders and creditors that you are a reliable borrower and increase your chances of qualifying for better rates and terms on loans, mortgages, and credit cards.
2. Keep Your Balances Low
Keeping your balances low is another important factor in helping your credit score. To keep your balances low, try to make more than the minimum payment. This can demonstrate that you are a responsible borrower and reduce your risk of defaulting on your debts.
3. Have a Mix of Different Credit Accounts
Having a mix of different types of credit accounts, including credit card accounts, can also contribute to a healthy credit score. If you’re able to manage them responsibly, having one or more credit card accounts can be an asset to your credit profile.
4. Become an Authorized User
Becoming an authorized user on someone else’s credit card account can also help your credit scores. As an authorized user, you have access to the credit card account, but you’re not responsible for paying the bills. However, the primary cardholder’s payment history and credit utilization rate can still be reported to the credit bureaus for both the primary cardholder and any authorized users on the account.
If the primary cardholder has a good credit history and maintains a low credit utilization rate, becoming an authorized user can help you establish a positive credit history.
How Do I Choose the Right Credit Card for My Needs?
Choosing the right credit card can make a big difference in achieving your financial goals, whether you’re looking to earn rewards or build your credit history.
To find the right credit card for your needs, you need to consider a few key factors.
1. Evaluate Your Spending Habits and Financial Goals
Consider how you plan to use your credit card and what rewards or benefits would be most useful to you. For example, if you travel frequently, a credit card with travel rewards might be a good choice. If you prefer to earn cashback on your everyday purchases, look for a credit card with cashback rewards.
2. Check Your Credit History and Credit Scores
If you have good credit, you may qualify for credit cards with lower interest rates, higher credit limits, and more rewards and benefits. If your credit history is limited or if you have poor credit, you may need to focus on building your credit with a secured credit card or a credit card with a lower credit limit.
3. Compare Credit Cards
Look for credit cards with rewards and benefits that align with your spending habits and financial goals, as well as interest rates, annual fees, and credit limits that fit within your budget and financial needs.
Choosing the right credit card is an important decision that can have a big impact on your financial well-being. Take the time to research your options and find a credit card that works for you.
What Are Some Tips for Using Credit Responsibly?
Using credit responsibly is critical when learning how to use a credit card to build credit and maintain a healthy credit history. To ensure you’re using your credit wisely, follow these tips:
Always pay your credit card bills on time and in full each month.
Paying your credit card bills after the due date can result in serious consequences, such as negatively impacting your credit scores and incurring high-interest charges and fees. To help avoid these negative outcomes, it’s important to pay on time and in full each month.
Keep your credit utilization ratio low.
This means keeping your credit card balance low and using only a small percentage of your available credit limit. Ideally, you should aim to use no more than 30% of your credit limit at any given time. Avoid maxing out your credit cards, as this can negatively affect your credit scores.
Monitor your credit reports regularly.
Check your credit reports often to ensure there are no inaccuracies or fraudulent activity that can negatively impact your credit scores. If you spot any inaccuracies, be sure to report them to the credit bureaus as soon as possible to get them corrected.
How Do I Monitor and Maintain My Credit Score?
Monitoring and maintaining your credit score is crucial for good financial health.
Regularly check your credit report for inaccuracies, fraudulent activity, and changes in your credit scores. When you catch an inaccuracy and address them promptly, you can prevent them from negatively impacting your credit scores.
You can also utilize the Credit & Debt financial platform to establish a personalized plan to manage credit. This platform provides professional coaching and reliable financial service options.
FAQs About Using a Credit Card to Build Credit
Here are answers to common questions about building credit with credit cards.
How should I be using my credit card to build credit?
Use your card regularly for small purchases, pay your bill on time, and keep your balance low to establish a positive credit history.
How much of my credit limit should I use?
Aim to use 30% or less of your credit limit. Lower usage (like 10%) is even better for maintaining or improving your credit score.
How much should I pay on my credit card to raise my credit score?
Always pay the full balance each month to avoid interest and improve your credit score. On-time payments are key to a healthy score.
What is a secured vs. unsecured credit card?
A secured card requires a cash deposit as collateral; an unsecured card doesn’t. Both help build credit, but unsecured cards are more common.
Do I need to carry a balance to build credit?
No, carrying a balance isn’t necessary. Paying off your card in full each month builds credit without incurring interest.
Bottom Line
Credit cards can help your credit scores if used responsibly. When choosing a credit card, evaluate your spending habits, credit history, and compare the available options.
It’s important to use credit responsibly by paying bills on time, keeping credit utilization low, and monitoring your credit reports regularly. With these practices in mind, you can help improve your credit scores and achieve greater financial well-being.
Credit & Debt financial coaches are an ideal resource as you explore building your credit with a credit card. Get started with Credit & Debt today for personalized guidance on all things credit and personal finance.
