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How To Build Your Credit Score With a Credit Card
By Liberty Laferriere MONEY RESEARCH COLLECTIVE
There are many benefits of having a good credit score, from increased credit limits to higher chances of being approved for mortgages and loans. However, with millions of Americans struggling with debt and poor credit, it’s important to know how to build your credit score with a credit card. When used responsibly, credit cards are a great financial tool to help you build credit and make empowered financial decisions.
Credit cards are one of the best ways to improve your credit score, and it’s time to start making your credit card work for you. Here’s how to build a credit score with a credit card.
How do credit cards work?
A credit card is a financial product that offers you a line of credit to spend money and make purchases with, allowing you to pay it back at a later time. To keep your credit card in good standing, you must make at least the minimum payment and keep your balance below the limit. Large credit card balances can lead to hefty interest charges and negatively impact your credit score.
The advantages
Credit cards are one of the best ways to build credit for many people, especially younger people who do not yet have a mortgage, auto loan or other financial products they can use to show good financial responsibility. Paying your bills on time, keeping your credit balance low, not opening too many credit accounts at once and avoiding interest are good ways to take advantage of a credit card.
The disadvantages
A disadvantage of a credit card is that it can rapidly become a source of high-interest debt. High credit balances and late payments can riddle you with debt and affect your credit score, leaving you in a hole that’s difficult to get out of. According to the Federal Reserve of New York, Americans held a record high of $925 billion in credit card debt as of the third quarter of 2022. Credit cards are a good tool but need to be approached responsibly.
Using a credit card to build your credit score
Here’s some information about the credit decisions you can make and how to choose credit cards that build credit so you can improve your financial situation.
Choose the right type of credit card
Learning how to build your credit score with a credit card starts with picking the best credit card for you. There are many different types of credit cards. Some offer cash-back rewards, points towards travel and dining or other perks. Some credit cards have annual fees, and some don’t. With so many different options, it can be difficult to choose. To demystify the process, here are examples of different types of credit cards that help build credit quickly.
Secured credit cards
One of the best credit cards for bad credit or for those who are just starting to build credit is a secured credit card. Secured cards require you to put down a deposit when you sign up for them to guarantee a specific credit limit. This means they usually have more lenient approval criteria. This is an excellent way to get credit card pre-approval without already having a good credit history.
Make sure you choose a card that reports your payment history to the three major credit bureaus. When you’ve made your payments consistently, on time and in full, for several months, you may start to see improvement in your credit score. If you receive pre-approval for a credit limit increase, it may be time to move up to an unsecured credit card, at which point you will receive your security deposit back.
Unsecured credit cards
An unsecured credit card does not require you to make a security deposit upfront but may have more restrictive requirements for pre-approval. In turn, they have better interest rates and rewards systems and are generally a preferable financial tool if you continue to use them responsibly. You can still build credit with unsecured cards; they are just harder to receive approval for.
The best way to move from a secured card to an unsecured card is to inquire with the same bank or credit card issuer that you received a secure card from and ask about their unsecured options. This may help you avoid an unnecessary credit check or “hard inquiry,” which will cause your credit to drop.
Rewards cards
Rewards credit cards offer you incentives in exchange for using your credit card. There are three main types of rewards cards: cash back, points and miles.
- Cash back credit cards offer you a percentage of cash back for each purchase you make, usually between 1% and 5%, and sometimes assign different percentage values to different purchases. You can then use this balance towards purchases or your credit card bill.
- Points cards offer you a fixed number of points per dollar you spend, which you can apply to purchases of certain goods and services.
- Miles cards offer you travel miles in exchange for the money you spend.
Rewards cards can be a great way to save money on things such as groceries, entertainment or travel in exchange for using your card. If you have questions about what your credit card offers, don’t be afraid to ask your credit card company.
Balance transfer credit cards
If you’ve accrued a significant amount of high-interest debt, you could transfer your balance. If you apply for a new credit card with a 0% annual percentage rate (APR) offer on balance transfers, you can transfer over your high-interest balance and pay off your debt with a 0% interest rate, which can save you a lot of money in the long run. These types of offers tend to only be available to those with higher credit scores, but it may be worth looking into when planning how to build credit for yourself.
Stay at or below 30% credit utilization ratio
One of the most common pieces of advice financial experts give for staying in good standing with credit card companies is to remain at or below a 30% credit utilization rate. For example, if you have a credit limit of $300, you will want to keep your balance below $100. This is an excellent move for your credit and can result in pre-approval for credit limit increases. It is also a good practice to avoid debt. Plus, your credit utilization ratio will decrease once your credit card limit increases.
Make on-time payments
Late payments can cause your credit limit to take a huge hit. When using credit cards to build credit, timely payments are imperative, as they signal to your credit card issuer and the major credit bureaus that you use your card responsibly. Don’t just make on-time payments to your credit card — pay all of your bills on time.
Other ways to make your credit report look good
If you’re wondering what constitutes a bad credit score and how to fix it, here are some ways you can increase your credit score:
- Pay all bills on time: Your ability to pay your other bills on time also affects your credit score, so make sure your loan payments, phone bills, utility bills and other payments are all on time every month.
- Become an authorized user: If you have a friend or family member in great financial standing — with a high credit score and credit limit and a low utilization ratio — you might want to see if they’d be willing to add you as an authorized user. This will help you build your credit as you will be connected to someone who has already built theirs.
- Deal with debt and collections: Debt does not look good to credit bureaus, nor does having amounts in collections or delinquent accounts. It may be daunting, but you must deal with these debts to improve your financial standing and increase your credit score.
- Check your credit and report errors: It is easy and valuable to check your credit score and keep tabs on how you are doing. Review what is being reported to your credit file and verify that the data is accurate. You can also use this information to determine where you are being hit the hardest and make changes to improve your situation. We also recommend trusting the best credit monitoring services and the best credit repair companies to help you identify weak spots and get you back on your feet.
Why bother building up your credit?
Good credit can open many doors for you, financially speaking. On a smaller level, good credit may allow you to apply for better credit cards that offer significantly more perks and rewards and a higher credit limit. You must prove you are responsible and will pay off your balance to qualify for these perks.
On a larger scale, you will need a good credit score for most financial decisions you will need to make. A high credit score makes it easier to be approved for an apartment, a mortgage, an auto loan, a business credit card, a line of credit and many other types of financial products and loans. Showing good financial habits with all of your banks, lenders and financial products is what builds credit. Improving your credit score also involves building strong financial habits that will set you up for long-term success.
Debt and other financial hardships can leave you in a difficult position, wondering how you can afford rent and how to remove a bankruptcy from your credit report. It is best to start thinking of your financial health now and setting yourself up for your future.
How do credit card companies determine a borrower’s credit limit?
Every credit card company is different, but there are a few common factors credit card companies use to determine your credit limit:
- Your credit history: Your credit history and credit score are a couple of factors credit card companies use to determine your credit limit. Don’t fear, as there are still other factors the company will use, as well as certain credit cards available with more lenient requirements for approval.
- Income and debt: Your debt-to-income ratio tells credit card companies whether you are ready to take on more debt and how likely you are to pay it back. You can determine your DTI by dividing your monthly debt payments by your gross income.
- Credit utilization ratio: High credit utilization can damage your credit, cause you to be hit with high interest rates and make you look bad on a credit application, even if you pay off your credit card regularly.
- History with the company: If you already hold a credit card with your credit card company, they will consider your current relationship when determining whether to offer you new products.
- Other economic circumstances: Sometimes, you aren’t the right fit for a certain credit card, or a credit card company isn’t in a good place to take a risk on you. If this is the case, move on with grace and try a different card.
Will applying for a credit card hurt your credit score further?
Because applying for a credit card can trigger a hard inquiry of your credit file, applying for a credit card can be one of the things that can hurt your credit score.
Get on top of your credit health
Improving your credit health begins with responsible financial practices like budgeting, paying bills on time, checking your credit score frequently and not living beyond your means. Financial tools can be challenging to navigate but can also be hugely rewarding in the long run when handled with care.
Liberty Laferriere is a freelance content writer who specializes in lifestyle, entertainment, fitness, finance, and real estate. In addition to writing SEO-optimized content, she also produces YouTube videos for real estate agents. Liberty has a BFA degree in musical theatre and continues to work as an actor and voiceover artist. When she's not writing, you can find her training for Olympic weightlifting meets, taking adult gymnastics classes, and caring for her pet bunny.