Your credit score and credit history have a significant impact on your financial life. It affects whether you can get a place to live, your mortgage rate, your ability to buy a car, and your ability to secure a personal loan. Approximately 16% of Americans have poor credit (a FICO score between 300 and 579), while only 1.2% of Americans have a perfect credit score of 850.
Building credit can be tricky; however, if you’re wondering how to use a credit card to build your credit, here are some answers.
How to Use a Credit Card to Build Your Credit
If you don’t have a credit card already, here are some good options to look into if you want to know how to use a credit card to build your credit:
- Secured credit card: A secured credit card requires the cardholder to send the issuer a refundable security deposit when the account is opened. This is a great option if you’re just starting to use credit cards.
- Starter credit card: A starter credit card is for people who have a limited credit history or bad credit.
- Student credit card: If you’re a student, a student credit card can be a good option. They usually have lower credit limits, but you can benefit from few fees and perhaps rewards on purchases.
- Become an authorized user: If you’re under the age of 18 or haven’t had much luck opening a credit card account, you can become an authorized user on someone else’s account.
Below are some tips on how to use a credit card to build your credit.
1. Set Up Automatic Payments
Autopay is an easy way to make sure you’re making timely payments on your credit card bill. Not making the minimum monthly payment on time could mean that a late payment will be recorded on your credit report. Your issuer may also charge interest for each day you carry a balance. Make sure the bank account the credit card is linked to always has sufficient funds to pay your credit card bill. Autopay is one of the easiest ways to streamline your finances and make payments on time.
2. Use It Like a Debit Card
Think of your credit card like a debit card. Don’t put yourself into debt just to raise your credit score, which can be counterproductive. Only use your credit card when you know you have the money to pay it off. Use your credit card to make everyday purchases such as groceries, gas, and bills, and then pay it off each month to start building your credit with your credit card.
3. Keep Your Balance Low
Credit utilization is an important factor when it comes to your FICO credit score calculations. Keep your total outstanding balance at 30% or less (ideally less than 10%) of your total credit limit. Going above 30% can cause damage to your credit score. You can calculate your credit utilization score either per-card or overall, as follows:
- Add the balance on all cards
- Add the credit limits on all cards
- Divide the total balance by the total credit limit
- Multiply by 100 to see your percentage
4. Limit Your Requests for New Credit
There are two types of inquiries on your credit report: soft inquiries and hard inquiries. Soft inquiries include checking your own credit, checks done by financial institutions, and credit card companies checking your file. These don’t affect your credit score. A hard inquiry can affect your credit score for up to two years. Hard inquiries include applying for a new credit card, a car loan, or a mortgage. Several hard inquiries in a short period could damage your credit score. Don’t open several credit card accounts at once; or, if you’ve recently secured a loan, try to avoid opening a new line of credit for a period.
5. Keep Accounts Open
The longer you keep your credit card and continue to make timely payments, the more responsible you’ll look to lenders. A common mistake that people make is closing old credit card accounts; this could hurt your credit score. Closing accounts lowers the average age of your accounts and you lose the available credit limit on that account. Find a card that meets all your needs and keep it.
Keep Monitoring Your Credit Score
Keep track of all your transactions and make sure you’re monitoring your credit score. Keeping an eye on your credit score can also help you prevent fraud or identity theft. Be wary of putting yourself into credit card debt to build your credit score. The best way to use a credit card to build your credit is to use your card responsibly.
