Building Credit with a Credit Card

You may not realize how much of your life your credit score affects. Lenders will check your credit EVERY time you apply for a loan, including a mortgage. Not to mention, your credit score often has a direct impact on the interest rate of your loan. Potential employers and landlords might also check your credit score if you are applying for a job or attempting to rent an apartment.

Building credit takes time and disclipline but if you have a little of both you are already off to a great start! Action is needed to build up your credit, regardless of whether you have no credit history or just flat-out bad credit. One of the best (and often the fastest) ways to build up your credit score is to use a credit card responsibly.   

Your Credit Card Options to Build Credit

Using a credit card properly is one of the fastest ways to build your credit. A few types of credit cards might be available to get this process started.

As you consider which type of card is right for you, be on the lookout for specific terms:

  • Interest rates
  • Security requirements
  • Annual fees
  • Transaction fees
  • Credit card limits

Ideally, you want to find the lowest interest rate possible, with no or minimal additional fees.

Student Credit Cards

A student credit card is specifically targeted to help students who do not have any credit history but want to build credit. [Fun Fact]: Credit card companies that offer student credit cards will actually look to the students’ grades to determine if they qualify.

If you are under age 21, then you must show proof of income to pay your debts as part of the qualification process. In some cases, you can ask parents, friends, or other relatives to be co-signer with you to qualify. Just remember that the co-signer becomes responsible for your debts if you don’t pay—so make your payments on time!

Secured Credit Cards

A secured credit card is connected to a deposit. The deposit is refundable, and it is only used if you default on your credit card balance. However, keep in mind that you cannot use the deposit to pay your monthly bills for the credit card.

The deposit is the same amount as your credit limit. Eventually, the credit card company may increase your limit over the deposit if you show that you can make your payments regularly. You might also be able to increase your limit if you increase your deposit.

As you show that you are a responsible credit card user, the company may switch your card to an unsecured card and refund your deposit. Not all credit card companies offer this option, so if that is your goal, you may want to check into that possibility before you apply for the card.

Low-Limit Unsecured Credit Cards

You can get a very low-limit credit card as a stepping-stone to build your credit. Most credit card companies offer cards with limits of $500, even to those who may have bad credit or minimal credit history.

Remember that it is okay to start small. Once you show that you are a responsible credit card user, the company may eventually increase your credit limit.

How to Get Your First Credit Card

Most credit cards today have an online application process that you can use. Some credit card applications take just a few minutes. You may need to provide information regarding your identity and income to submit your application.

If you are not ready to get your own credit card, you might also be able to become an authorized user on someone else’s credit card. As an authorized user, you piggyback off of someone else’s good payment history. Just be sure that you trust the other person to make payments on time—their bad payment history can latch on to you as well.

Using Your Credit Card to Build Your Credit Score

Simply having a credit card will help your credit score, but the process is slower if you do not use the card. Instead, using the card responsibly will help you build your credit faster.

The following tips provide some general advice about how to best use your credit card to increase your credit score.  

1. Keep your credit utilization rate low. (Don’t max out your card!)

Your credit utilization rate is the percentage of the total credit that you are using. For example, if your credit card has a limit of $500 and you have a balance of $50, then your credit utilization rate is 10%.

As a rule, you should keep your credit utilization rate below 30%. If you keep a balance of anything above 30%, that will damage your score, rather than improve it. A utilization rate of between 1% and 10% will have the most beneficial effect on increasing your score.

2. Always make payments on time.

Paying on time is extremely important to build your credit. In fact, payment history makes up 35% of your score. Having a good payment history is great for your score, but getting behind can really damage your score.

Even one payment that is more than 30 days late will stay on your credit report for seven years before it falls off. That one late payment can also drop your score by as much as 100 points.

3. Use your credit card and track your usage carefully.

Having a payment history with a credit card requires that you actually use the card. You can pay it off every month and still get the beneficial effects of building your credit score. Just be sure that you do not get caught in the “overspending trap”.

Using your credit card for expenses you pay for anyways is a great way to use your card. Examples might include gas, groceries, or utility payments (think recurring payments too, like Netflix, etc).

How Long Will Building Good Credit Take?

There is no hard and fast rule about how long getting a good credit score will take. However, if you don’t have a score at all, FICO will assign you a score within six months of starting to create a credit history. Building from bad to good credit may take significantly longer.

Responsible credit card ownership can help you increase your credit score. Use these tips to get the process started, and you will be well on your way to a great credit score.