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One of the best ways to establish credit is through responsible credit card use. Always make your payments on time, and only use a small percentage of your credit limit. With that routine, you can generate an excellent credit score.
We’ll go into how using a credit card to establish credit works, as well as how to apply for your first credit card and use your partner’s or parent’s card as a credit card if you’re not yet ready to handle a credit card of your own.
5 steps to build credit with a credit card
When you responsibly handle a credit product, such as a loan or credit card, you can establish credit. The three main consumer credit bureaus, Equifax, Experian, and TransUnion, each keep a credit report with your past information, and the lender will report your behavior to them. Although your credit score is not contained in your credit reports, it is derived from the data in your reports. Here are five pointers for using a credit card to establish credit:
Pay on time, every time (35% of your FICO score)
Making timely payments is the most crucial element in establishing good credit. Payment history accounts for %2035% of your FICO score, which is the credit scoring model that lenders typically use, and %2041% of your Vantage score.
We always advise paying off your credit card in full because you will usually be able to take advantage of a grace period to avoid paying interest. To avoid the issuer reporting a late payment to the credit bureaus, pay at least the minimum amount each month if you are unable to pay off the entire balance.
Keep your utilization low (30% of your FICO score)
This is a good general guideline to maintain your credit utilization at 30 percent or less. Issuers may interpret the near-maximization of your credit limit on your card as an indication that you may not be able to repay the borrowed funds.
The term utilization, also known as utilization ratio, refers to the percentage of your credit limit that you are using. As an illustration, suppose you are carrying a balance of $150% on a credit card with a $500 credit limit. In that case, the utilization
Utilization is determined for each credit card separately as well as for all of your credit cards combined. Carrying $150% on a card with a $500 limit and $600% on a card with a $1,000 limit, for instance, would be %2050% of total utilization.
Limit new credit applications (15% of your FICO score)
When applying for new credit cards, exercise caution and set a limit on the quantity of new accounts you open.
The length of your credit history accounts for 2015% of your FICO score. The average age of your accounts, which decreases with each new one you open, plays a part in this. Additionally, applying for new credit results in a hard inquiry, which could lower your credit score by five to ten points.
By carefully selecting which new credit to apply for, you can keep your average age of accounts higher while lowering the amount of inquiries on your credit reports. This will also assist you in avoiding raising red flags with possible lenders: Too many credit applications can suggest to lenders that you’re in need of money, which makes you a risky borrower.
Use your card regularly
Using your credit card for regular purchases is a good idea, even though you shouldn’t charge more than you can afford to pay off on your new account.
Credit card issuers prefer it when you use your card and don’t keep it idle. Additionally, your FICO Score’s “length of credit history” factor considers the duration since you last used particular accounts.
To establish credit, you don’t need to charge a lot on your credit card. Charging a small, regular transaction to your credit card, such as a monthly streaming subscription, and setting up autopay to ensure you never miss a payment is one way to establish credit while managing your balance. Those monthly transactions and timely payments should support you on your path to a good credit score even if you put the card away.
Increase your credit limit
Raising your credit limit is an additional strategy to reduce your credit utilization. You can spend more freely with a higher credit limit without significantly raising your utilization ratio.
It might not be possible to immediately increase your credit limit. Typically, new cardholders begin with a low credit limit, particularly with secured cards where your limit is set by the amount of your deposit. Consider this step as a long-term objective as opposed to a short-term one.
You should be able to raise your credit limit with time and responsible behavior. Certain secured card issuers provide the option to convert to an unsecured card and receive your deposit returned. Additionally, with an unsecured card, you can usually ask for a higher credit limit on a periodic basis. You can try contacting the customer service number listed on the back of your card or logging into your online account.
Getting your first credit card
When you have little credit history or possibly no credit at all, it’s critical to choose which credit card to apply for. There are credit cards that are more accommodating to those who are just starting out with credit, such as secured cards, student cards, and store cards, even though many of the credit cards that offer the biggest rewards require good to excellent credit.
Build credit with a secured card
A secured credit card is usually a wise option if you have bad credit or no credit history at all. It is “secured” because you will have to give the issuer a security deposit equal to your desired credit limit. Secured cards are typically available even with poor or limited credit because they safeguard the issuer in the event that you default.
The Discover it® Secured Credit Card is one notable example of a secured card. Customers with restricted or bad credit may apply for the card; there is no annual fee; and a deposit ranging from $200 to $2,500 is needed.
- No credit score required to apply.
- Build your credit history, receive cash back, and pay no annual fees
- A refundable security deposit is required for your secured credit card, and your credit line will match the deposit amount, which starts at $200. Bank information must be provided when submitting your deposit.
- Reviewing automatically every seven months to see if we can move you to an unsecured credit line and reimburse your deposit
- Get 2.2 percent cash back at Gas stations and restaurants on up to $1,000 in total purchases every quarter, automatically Plus earn unlimited 1% cash back on all other purchases.
- By assisting you in removing your personal information from specific people-search websites that may sell your data, Discover could help you limit the exposure of that information online. It’s free, activate with the mobile app.
- Get alerted if any of the thousands of Dark Web sites contain your Social Security number. Activate for free.
- Terms and conditions apply.
Recommended Credit
How Does LendingTree Get Paid?
Companies on this website pay LendingTree, and this compensation may have an impact on where and how offers appear on the site (such as the order). Not every lender, savings plan, or loan option on the market is represented on LendingTree.
Additionally, it earns cash back in helpful categories: Cardholders receive 2.2 percent cash back at Gas Stations and Restaurants on up to $1,000 in total purchases made each quarter, automatically Plus earn unlimited 1% cash back on all other purchases.
However, this card’s APR is high, at 28. 24% Variable APR. Check out our review of the.
Build credit with a student card
There are credit cards made especially to assist college students in establishing credit histories.
The Capital One SavorOne Student Cash Rewards Credit Card is one credit card that sticks out for students. With no annual fee and no deposit needed, this card can be obtained by customers with fair to limited credit.
- Receive an infinite amount of 3% cash back on dining, entertainment, popular streaming services, and groceries (not including superstores such as Walmart and Target) and 1% off all other purchases.
- Earn $50 when you spend $100 within the first three months of the Early Spend Bonus.
- Get 2010 percent cash back on purchases made through Uber.
- With $0 Fraud Liability, you can relax knowing that you won’t be held accountable for any unauthorized charges.
- Enjoy no annual fee, foreign transaction fees, or hidden fees
- Get up to 5 percent cash back on hotels and rental cars when you book through Capital One Travel. This is the place where you can find the best deals on thousands of travel options. Terms apply.
- Refer friends and family, and when they’re accepted for a Capital One credit card, you can earn up to $500 annually.
- Get 8% cash back on entertainment purchases when you make reservations via the Capital One entertainment portal.
- Build your credit with responsible card use
- This card could be a possibility for you if you’re enrolled in a community college, four-year university, or another type of higher education.
- Some of the benefits offered by Visa® or Mastercard® for Capital One products listed on this page may differ depending on the specific product. Details can be found in the corresponding Guide to Benefits, as terms and exclusions apply.
Recommended Credit
How Does LendingTree Get Paid?
Companies on this website pay LendingTree, and this compensation may have an impact on where and how offers appear on the site (such as the order). Not every lender, savings plan, or loan option on the market is represented on LendingTree.
Notably, this card comes with a generous cash back program. %20Cardholders%20earn%203%%Cash%20Back%20on%20dining,%20entertainment,%20popular%20streaming%20services, and%20at%20grocery%20stores%20(apart from superstores like Walmart%C2%AE%20and Target%C2%AE); %205%%Cash%20Back%20on%20hotels%20and%20rental%20cars%20booked%20through%20Capital%20Travel%20(terms%20apply); %208%%Cash%20Back%20on%20Capital%20One%20Entertainment%20purchases; %201%%Cash%20Back%20on%20all%20other%20purchases
Still, it comes with a potentially high APR: 19. 99% – 29. 99% (variable). Check out our review of the.
Build credit with a store card
Store credit cards are already familiar to you if you’ve ever been asked to apply for a credit card when checking out at a store, or if you’ve ever been given the option to start a credit card application when checking out on Amazon. The good news is that store cards frequently have less restrictive requirements than certain other credit cards, and they can aid in credit building. The bad news is that they frequently have exorbitant interest rates and rewards programs that seem to be intended to make you spend more money than you otherwise would at the store.
The Target REDcardTM Credit Card is one store card that sticks out. No deposit is needed, there is no annual fee, and customers with good credit can apply for the card. Additionally, if you shop at Target even occasionally, this card can help you save money. It is applied when you check out. E2%80%94 cardholders receive 5% off at Target both in-store and online.
The Target REDcardTM Credit Card information was gathered independently by LendingTree and was not examined or supplied by the card issuer before it was published. Check out our review of the.
Becoming an authorized user on someone else’s credit card
Consider requesting to be added as an authorized user to one of your family member’s or close friend’s credit cards if you are unable to obtain credit on your own (or simply don’t want one) but they are responsible with their money.
Becoming an authorized user can quickly boost your credit score. When using multiple cards, the credit reports of the primary cardholder and any authorized users are updated with balances and payment histories. This implies that even if you never use the card yourself, you are effectively “borrowing” your family member’s or friend’s account history if they use it.
The primary cardholder is ultimately liable for any credit card charges you make, which is a drawback. Make sure you’ve worked out the specifics of how to pay back any purchases you make in order to prevent disputes with family or friends. To reduce temptation to overspend on the account, you can even decide that the primary cardholder will hold onto the physical card the issuer sends you.
If you’re ready to move forward after a year or so as an authorized user, you might be able to get approved for your own credit card. If so, check out our list of the top credit cards for first-time applicants.
Frequently asked questions about building credit with a credit card
No, you can establish credit history without having a balance on your credit card. You will accrue credit as long as you use your card and your issuer keeps track of your purchases and payments and reports it to the credit bureaus.
We advise you to always pay off your credit card in full rather than gradually making smaller payments. When you roll over your balance from month to month, you will incur interest charges unless you are in an introductory APR period.
Certainly, using a store credit card will establish credit history as long as the issuer notifies the credit bureaus of any activity.
We advise applying for a secured credit card if your credit score is low. With these cards, you will need to provide the issuer with a security deposit, typically in the amount of your desired credit limit, with minimums typically around $200.
Secured cards are generally more accessible to those with poor credit than unsecured cards because the deposit safeguards the issuer in the event that you don’t repay the balance (meaning cards which do not require a deposit)
Monitoring your credit score once a month is an excellent method to stay on top of your credit-building journey. This is possible with a LendingTree Spring account, and many issuers also offer free credit score reporting.
In addition, federal law guarantees that each of the three credit bureaus (Equifax, Experian and TransUnion) must provide you one free copy of your credit report per year. You can get these reports from annualcreditreport.com. And, during the coronavirus pandemic, the bureaus have been providing free reports on a weekly basis.
No, prepaid cards do not build credit history. When using a prepaid card, you load money onto it before using it for purchases. On the other hand, when you use a credit card, you borrow money from the provider and have to pay it back.
Can you build credit without a credit card?
Although using a credit card responsibly is one way to build credit fairly quickly, it is possible to build credit without one. Here are a few methods:
- Other types of loans. Your credit history will be built if you make your loan payments on time for personal, vehicle, or education loans.
- Experian Boost. This is a free service provided by Experian, a credit bureau, to assist people who have little or no credit history in establishing credit. Experian Boost allows you to establish credit and possibly raise your credit score by making payments for things like Netflix, utilities, and phone bills that wouldn’t typically go toward your credit history. The catch is that Experian will be the only credit bureau where you establish credit history; the other two bureaus won’t.
- Credit builder loans. A credit builder loan, like a secured credit card, necessitates a deposit into a certificate of deposit (CD) or savings account. After that, you’ll make loan installment payments, which are recorded with the credit bureaus.
If you’re worried that using a credit card will make you more likely to overspend, think about charging a little amount on a regular basis, enabling autopay, and then keeping the card hidden. In this manner, you avoid the possibility of building up a sizable balance while still enjoying the advantages of having your monthly expenses and payments reported to the bureaus.
Some of the aforementioned benefits are offered by Visa® or Mastercard® for Capital One products listed on this page, and they may differ depending on the product. Details can be found in the corresponding Guide to Benefits, as terms and exclusions apply.
- Expertise: Personal finance, credit scoring, credit cards
- Education: Radford University, East Carolina University
Former senior credit card writer for LendingTree, Glen Luke Flanagan He became a member of the team in June 2019, and he spoke about new credit cards, credit score computation, and credit card interest. Before joining LendingTree, Glen worked in journalism and government communications. His reporting garnered awards from the South Carolina Press Association and the North Carolina Press Association while he was employed as a journalist for newspapers in both states. In May 2014, Glen received his summa cum laude degree in media studies with a journalism concentration from Radford University. In addition, he received a graduate certificate in marketing and a master’s degree in English with a focus on technical and professional communication from East Carolina University in May 2022.
The aforementioned promotions and/or offers might have changed, expired, or are no longer available. Check the Issuers’ website for more details.
FAQ
How to use a credit card wisely to build credit?
If you have a credit card, try to pay off the entire balance each month by making all of your payments on time. Keeping your credit utilization ratio lower can be achieved by making larger monthly payments than the minimum.
How much of a $300 credit limit should I use?
Aim to charge a credit card with a $300 limit for no more than $90, then pay the entire balance by the due date. The general rule of thumb is to maintain your credit utilization ratio below 30%. The formula for credit utilization is to divide your balance on your statement of credit by your credit limit, then multiply the result by 100.
How much should I pay on my credit card to raise my credit score?
Attempt to maximize your credit utilization or less. If you are unable to do so consistently, a good general rule of thumb is to maintain your total outstanding balance at maximum credit utilization or less. From there, you can focus on reducing that to 10% or less, which is thought to be the best way to improve your credit score.
Read More :
https://www.lendingtree.com/credit-cards/articles/use-a-credit-card-to-build-credit/
https://www.capitalone.com/learn-grow/money-management/how-to-use-a-credit-card-to-build-credit/