Improve or repair your credit score by building good credit. Find out how credit cards affect your credit report and what you can do to establish credit.
A healthy credit history can help you be easily approved for a credit card, car loan or mortgage. But if for one reason or another you have a limited or bad credit history, it may be a lot harder to get the financial products you want or need.
It’s important to consider your credit report and credit score as soon as possible — and using credit cards responsibly can help get the ball rolling uphill. This guide looks at exactly how you can use a credit card to build good credit history at any stage of life.
What types of credit cards can I build my credit history with?
There are several types of credit cards that can help build your credit score, however, it’s important to keep in mind that a good credit history only happens if you can manage the account well.
These are different kinds of credit cards that could get your credit report on the right track.
- Secured. If you’ve never had a credit card or have limited credit history, you’ll have a better chance of approval with a secured credit card. Secured credit cards require a cash “security” that acts as your credit limit. The cash deposit lessens the risk the bank takes when dealing with a new borrower — even if payments are missed. Secured credit cards typically come with annual fees and high interest rates.
- Unsecured. Unsecured credit cards have stricter eligibility requirements than secured cards because there’s no cash deposit required. Lenders will look at your income, your credit history and the amount of debt you currently have before approving you as a borrower.
- Student. When college students have unexpected expenses — no, not a kegger — they generally don’t have a steady cash flow, this makes having a student credit card a useful financial tool. Most student credit cards come with low credit limits and unfavorable interest rates, but if you pay off the balance every month you won’t have to worry about interest.
- Store or retail. Though store credit cards can have high interest rates, you can use the card to your advantage by buying items with the card and immediately paying the balance in full. This strategy allows you to skip paying interest, plus most store credit cards come with discounts for in-house spending.
You’ll want to make sure that the credit card you apply for reports to the three major credit bureaus in order to build your credit history.
How do credit cards affect my credit report?
Credit cards are a valuable tool for building credit history because they add key details that can impact your credit report, including:
- The type of account. Revolving debts like credit cards are generally considered very important accounts to have listed on your credit history because it shows lenders your ability to manage a line of credit.
- Credit limit. When you get a credit card, your credit limit is also listed on your credit report. These details help lenders see how much credit is currently available to you when reviewing your application.
- Monthly payment history. Details of if you pay your credit card balance on time, late or not at all give lenders an idea of your financial management skills. Your payment history also show negative information, like if your account has been sent to collections.
- Duration of account. Because the length of your credit history is one of the factors that goes in to calculating your credit score, the date you opened or closed any account is listed. You can also see the most recent date that the lender has reported your activity to the credit bureaus.
Keep in mind that these are just some of the details listed and that there’s much more involved for fully understanding your credit report.
How can I use a credit card to improve my credit score?
Over time, these positive credit habits could be reflected in your credit report and help you get a better chance of approval in the future:
- Only apply for one card at a time. Having too many credit card applications can hurt your credit score, so make sure you compare credit cards and then apply for the one that best suits your needs at the time.
- Make payments on time. Paying your credit card balance on time or before the due date shows lenders you’re responsible with your accounts. To ensure you make payments on time, set up an autopay that draws funds from your bank account.
- Pay your balance in full every month. Paying your complete credit card balance each month reduces the risk of serious debt and lets you avoid paying any extra interest. Consider a simple, no-frills credit card to help curb your spending in pursuit of rewards.
- Increase your credit limit. If you get a pay raise at work or your financial circumstances improve in some other way, asking for a higher limit for your credit card can lower your credit utilization ratio.
- Keep balances low. Lenders report your account balance monthly to the credit bureaus. Since the amount of debt you have accounts for 30% of your credit score, the lower your balance, the better your credit score.
- Regularly review your credit card details. Taking time to go over your account can help you see how well you’re managing your credit card. It will also help you decide whether or not you want to increase your credit limit, upgrade the account or even apply for another credit card.
- Don’t close your account. You might think that if you’re not planning on using a credit card anymore, that you should close the account, however, this could have a negative impact on your credit score if it’s an old account. The length of your credit history makes up about 15% of your score, so keep that account open and active.
Tips for using a credit card effectively
When using your credit card to build your credit history, you’ve got to be smart with how you’re spending. Here are a few common tips that can keep your account balances under control:
- Create a budget. This is one of the first things you should do once you get a credit card in your hands. Even if you’re approved for a credit limit of $4,000, you certainly shouldn’t be spending that much a month. Calculate all of your monthly expenses to see how much wiggle room you have in your budget to put towards a monthly credit card payment — don’t spend more than that amount.
- Use it like you’d use a debit card. It’s easy to get carried away when spending with a credit card because the balance isn’t directly reflected on your bank account statement. You’ve got to keep in mind that though you don’t owe the money back that very second, you’ll have to pay the debt eventually. And if you can’t pay the balance in full, you’ll likely pay extra in interest.
Can I build credit with a credit card on a small income?
Your income isn’t a factor that goes into calculating your credit score, however, it may limit what loans and credit cards you have access to. But that doesn’t mean you can’t achieve a stellar credit score by practicing responsible borrowing habits.
If you find you’re getting denied because you’re unable to meet eligibility criteria due to income, you can always apply for a secured credit card or a credit builder loan. Once you’re approved for credit, the next step is successfully managing your credit with on time and full payments.
What else should I know about establishing my credit history with a credit card?
Now that you know what types of credits cards there are and the effective strategies on how to use them to achieve a healthy credit score, there a just a few more things you should be aware of.
Applying for the right card
To build a good credit history, start by applying for cards you’re eligible for. For instance, if you have no credit history at all, you’ll likely have to start with a secured credit card. Borrowers who’ve had secured credit cards in the past that want to continue to build their credit could apply for an unsecured credit card.
Look for card features
Once you’ve narrowed down what type of card seems right for you, go the extra mile and start to research what credit cards come with little or no interest, waive late fees and offer rewards.
Don’t make too many credit inquiries
Applications for credit cards can result in a hard pull of your credit, which is listed on your credit report. The risk is increased for lenders if there aren’t any previous applications because they don’t have a way to gauge your creditworthiness. Also, when you have a lot of applications in a short period, it may make you appear to be desperate for credit.
When should I apply?
Building your credit takes time, so the sooner you apply the better. It’s worth noting that according to the CARD Act of 2009, all applicants under 21 years old need to provide proof of income along with their credit card application.
Should I get a second credit card?
Once you get your first credit card, don’t apply for another one until you’ve successfully managed your initial credit account for at least six months. The key here is to build your credit report to show lenders that you can make payments on time and not abuse your credit limit.
Managing your credit card account responsibly, not applying for too many cards at once and knowing which cards are fitting for your situation can put you in a position that helps you build and improve your credit history.
Looking for other ways to repair your credit?
With a wide range of options to choose from, credit cards are often a gateway to a better credit history when managed sensibly.
So, whether you’re just starting your financial journey or need to reclaim your creditworthiness, keeping this credit card advice in the back of your mind may be able to help you meet financial goals and improve or repair your credit.