How to Build Credit With a Credit Card
Given the number of Americans who abuse their credit cards, you might think that opening one is a good way to damage your credit. But actually, your credit card can help you boost your credit score, provided you use it correctly. If you're careful to make each minimum payment, avoid carrying a balance, and keep your credit utilization low, you can turn a bad credit score into a stellar one over time. Here's a quick guide on how to build credit with a credit card -- even if you're starting out with no credit history at all.
1. Always pay your credit card bills on time
Your payment history is the single most important factor that goes into your credit score. If you charge items on a credit card regularly and always make a point to pay your bills on time and in full, you'll end up boosting your score. Even if you can't pay off your balance in full, as long as you consistently make your minimum payments by their deadlines, you'll get credit for having paid on time.
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2. Stay well below your credit card limit
Your credit utilization ratio, or the extent to which you're using your available credit, is another key factor that goes into establishing your credit score. Keeping your credit utilization ratio to 30% or below can help you boost your score, while exceeding that 30% threshold can damage it. So if you have a $10,000 credit limit and make a point to never charge more than $3,000 at a single time, you'll be in pretty good shape.
3. Open a secured credit card
Credit cards can help you build credit, but if you don't have much of a credit history, you may not get approved for a card in the first place -- and thus goes what can often be a fairly vicious cycle. On the other hand, if you're willing to open a secured credit card, you'll get an opportunity to establish a credit history and build up your score in the process. A secured credit card is one that requires you to keep a specific amount of money in an associated bank account as collateral. As long as you're able to provide that amount, you'll typically get approved for a secured card, even if you have no credit history to speak of. Then, once you start using that card and paying your bills on time, it'll count toward your payment history, which will help boost your score.
4. Become an authorized user on somebody else's credit card
If you don't have good enough credit to get approved for your own card, and you don't want to open a secured card, another option is to use someone else's credit card to build up your own score. If you have a relative or friend who's willing to add you as authorized user to his or her account, that person's payment history will get added to yours -- which means you'll need to partner with someone you can trust to pay the bills on time. Furthermore, when you become an authorized user on another account, that card's limit gets added to yours, which can help drive down your credit utilization ratio.
5. Keep credit card accounts in good standing open as long as possible
Your credit history, or the length of time you've had active accounts, also plays into your credit score. If you have an account that's been open for years, and it's an account in good standing, keeping it open long term can wind up boosting your credit. Now, if your card suddenly alters its terms and starts charging an exorbitant annual fee, you may wish to forego the credit history benefit and close out your account. But unless you have a pressing reason to unload that card, keeping it open can work in your favor.
Credit cards can be instrumental in building your credit as long as you use them responsibly. If you're starting out with decent credit but want to improve your score further, you might consider applying for one of the cards on this list.
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