Using credit cards can be more practical and safe than paying with cash or a debit card. Additionally, credit cards are an effective tool for managing finances and building a credit history. Read this article to find out the best way to use a credit card to build credit for first-time credit card users.
One of the best ways to establish a positive credit history and raise your credit score is by using credit cards wisely. When used properly, using a credit card offers more benefits than just a quick way to pay for necessities; it may help you build your creditworthiness and open up a variety of future prospects, like more cheap borrowing choices.
The secret is always managing your credit card strategically and wisely, keeping healthy credit habits in mind. Constantly make on-time payments and have a modest balance. If you don’t have credit, you most likely believe that getting approved for a credit card is next to impossible. Getting hold of your first credit can be difficult, but if you get a credit card, you’ll discover that it’s one of the finest ways to develop credit.
Read this article to learn everything about building credit using a credit card, along with the best way to use a credit card to build credit; we’ll also look at how does building credit with a credit card work, as well as how can you get your first credit card on a parent’s or partner’s card if you’re not ready to manage your own credit card just yet.
What is a credit card?
If you just recently got your hands on a credit card, you might have many questions on your mind, like what is a credit card, how does building credit with a credit card work, and many more. In order to clear your confusion as a first-time credit card user, we are going to answer some of your burning questions so that you can get a clearer picture of the working of a credit card before you start building credit using your credit card.
A credit card is a small, rectangular piece of plastic or metal that is given out by a bank or other financial services provider and enables cardholders to borrow money to use to pay for products and services from businesses that accept credit cards. Credit cards require cardholders to repay the borrowed funds, plus any associated interest and additional agreed-upon charges, in full by the billing date or over time.
The credit card issuer may additionally provide cardholders with a separate cash line of credit (LOC) in addition to the usual credit limit, allowing them to borrow money in the form of cash advances that can be accessed through bank teller machines, ATMs, or credit card convenience checks.
Compared to transactions that access the primary credit line, such cash advances often have different terms, such as no grace period and higher interest rates. Issuers typically set borrowing caps depending on a person’s credit score. Credit cards continue to be one of the most widely used payment methods for purchasing goods and services for consumers today. The vast majority of businesses allow customers to use them to make transactions.
How does building credit with a credit card work?
Compared to other consumer loans, credit cards often have a higher annual percentage rate (APR). Interest charges on any unpaid balances charged to the card are typically imposed approximately one month after a purchase is made (except in cases where a 0% APR introductory offer is in place for an initial period of time after account opening) unless previous unpaid balances were carried forward from a previous month—in which case no grace period is granted for new charges.
Credit card companies are required by law to provide a grace period of at least 21 days before charging interest on purchases. That is why, wherever possible, paying off bills before the grace period expires is an excellent practice. It is also critical to understand if your issuer charges interest daily or monthly, as the former results in larger interest charges for as long as the balance is unpaid.
This is particularly important to understand if you want to transfer your credit card debt to a card with a reduced interest rate. Switching from a monthly accrual card to a daily accrual card by mistake may negate the savings from the lower rate.
What are the types of credit cards?
With so many options, selecting the best credit card can be difficult. It frequently depends on how much you can pay, your credit score, and why you want one – for example, is it to spread the cost of a purchase, establish credit, or cover an unexpected expense?
We’ll explain the different sorts of credit cards and point you in the right direction for more information. Remember that credit cards frequently have high APRs, making them a potentially costly method to borrow if you can’t pay off the bill in full each month. Cards can be handy for spreading out expenses and providing additional security on purchases, but they should not be used to manage long-term debt.
- Reward cards
- Store cards
- Secured credit cards
- Prepaid debit cards
- Credit builder cards
- Travel credit cards
- Money transfer credit cards
- Purchase cards
- Balance transfer cards
This type of card offers rewards for using it, such as travel miles, cashback, or store discounts. It frequently comes with an annual charge and hefty interest rates, so make sure the benefits outweigh the costs. To be authorized, you may need to have a strong credit score.
Many large national merchants issue branded credit cards that include the name of the business prominently on the front in an effort to foster client loyalty. Co-branded major Visa or Mastercard credit cards are other options provided by several major retailers, and they can also be used outside of retail stores.
Store cards that are only specified to specific stores and not co-branded can only be used to make purchases from the issuing stores, which may provide cardholders with benefits like exclusive discounts, promotional notices, or special sales, despite the fact that getting one is often easier for consumers than getting a major credit card.
Secured credit cards
Credit cards that require a security deposit from the cardholder are known as secured cards. These cards provide constrained credit lines with limits equivalent to the security deposits, which are frequently repaid when cardholders use their cards responsibly and repeatedly over time. Those with weak or restricted credit histories typically apply for these cards.
Prepaid debit card
Prepaid debit cards are a form of protected payment card, much like secured credit cards, where the available funds are identical to the monies that the cardholder has previously parked in a linked bank account. Unsecured credit cards, in contrast, do not call for collateral or security deposits. These cards typically have bigger credit limits and cheaper interest rates than secured cards.
Credit builder cards
Low credit score? Your credit history could be improved with the help of these cards. Since they are made for people who are seen to be high-risk, they frequently feature low credit limits and high-interest rates. However, timely and complete payment of monthly bills can demonstrate your dependability to lenders and lead to better credit offers in the future.
Travel credit cards
traveling abroad? You can incur high costs if you use your regular current credit card to make international cash withdrawals or hotel reservations. However, taking a large sum of money might be awkward and dangerous. You can save the cost of using a card abroad by using travel and currency cards.
Money transfer credit cards
Basically, you can borrow money with this kind of credit card. Direct bank account transfers are possible from the card, typically for a modest fee. It’s frequently used to assist in paying off bank overdrafts; however, the debt won’t be eliminated; rather, it will only be transferred to your card. Money transfer cards normally provide a 0% rate period, though approval can be subject to your credit score.
Want to divide the cost of a significant purchase? These cards typically feature interest-free periods, which can make borrowing money from them affordable. To maintain the 0% rate, you must adhere to the terms and make the required minimum payments. It’s ideal if you can pay off the entire balance before the interest-free period expires. You typically need a high credit score to qualify for this kind of card.
Balance transfer cards
Have a credit card already? By transferring your current card debt to a balance transfer card, which is normally done for a modest cost, you may be able to lower the amount of interest you pay. For a predetermined duration, these cards often provide 0% or low-interest rates. To obtain one, you might need a good credit rating.
How do I get a credit card if I don’t have any credit?
It might be a bit of a dilemma to establish a credit history. Since you are an unproven borrower, businesses and banks are less likely to provide you with credit if you have no credit. One of the simplest ways to begin is to open a secured credit card. There is no danger for the lender because spenders only borrow from the money they put down as a deposit, giving them an overview of your spending and repayment history.
Becoming an authorized user on an established credit account, such as a parent or spouse, is another approach to begin developing credit. Your account will show the cardholder’s credit history, giving your credit report more lifespan. But be sure the partner you choose has sound credit practices. Poor financial decisions made by them will also reflect poorly on you.
How can you get your first credit card?
If you’re prepared to apply for your first credit card, bravo for doing your research before accepting the first offer you see. Not all credit cards are made equal. Terms and benefits differ, even among beginner credit cards.
When you have little or no credit history, choosing the correct credit card to apply for is critical. While many of the most rewarding credit cards demand good to excellent credit, several are more welcoming to people new to credit, such as secured cards, student cards, and shop cards. Here is all the information you require to select the appropriate card for your circumstances before you step into the phase of going for the best way to use a credit card to build credit.
Some steps you can take to get your first credit card
Make sure you are familiar with the fundamentals of credit before you begin applying. You should understand how credit card interest operates (as well as how to avoid paying it), as well as how credit rating functions, and why they are important.
It’s crucial to start weighing your selections as soon as you feel comfortable using your first card. Most credit cards won’t be available to you if you have little or no credit history since the issuers lack the information necessary to determine your credit risk. There are still a few ways to access your initial credit card account. The following information will help you get a credit card for the first time, which will help you in building credit using a credit card:
- Become an authorized user on someone else’s card
- Get a starter credit card to start building credit
- Identify important cardholder benefits
Become an authorized user on someone else’s card
Adding yourself as an authorized user on someone else’s credit card account is a terrific way to get started. You will have some account access, but the principal cardholder must make payments. If you’re under 18, this is a fantastic choice. Credit card companies are only allowed to sell you their products if you are 18 years of age or older, but many of them let cardholders add a child as an authorized user.
Your credit report will reflect your parents’ credit activity if they add you to one of their credit cards. This will help you swiftly build up valuable credit history. However, there is a catch: By using someone else’s account, you depend on their timely payments to raise your credit score. Having your name on your parent’s account could lower your score more than it would raise it if your parent (or anybody else you ask) doesn’t always use credit cards responsibly.
If your name is on the account, you are an authorized user even if you don’t use the card or have one in your name. But you might also use this as a chance to work on managing your cards responsibly. Consult with your parents to determine how much you can afford to spend each month, then give them money each month to cover your outgoings. By doing this, you can establish the practice of paying your credit cards on time each month.
Get a starter credit card to start building credit
If you are older than 18, you are not required to ask your guardian for assistance if you choose not to. However, as was already mentioned, if you have little to no credit history, credit card companies have no means to determine how responsible you are with your debt. They can only provide you with their “safe” options as a result, which might not be all that fascinating. However, these cards act as a springboard for higher credit and better credit card offerings.
These choices include secured credit cards, store credit cards, student credit cards, secured credit cards, and credit cards made for people with bad credit or no credit. However, be aware that many cards catering to those with poor credit don’t offer favorable terms. It makes no sense, for instance, to pay an annual fee for a card that doesn’t offer benefits, especially if it’s a secured card (meaning you had to pay a deposit to apply).
Identify important cardholder benefits
Even after you’ve determined the type of credit card you believe will be ideal for you, you’ll want to examine several possibilities within that category. All credit card companies provide different benefits to their users, so it’s worth searching around until you find some options that work best for you.
If you enjoy traveling, for example, you should look for a credit card that provides excellent travel rewards and advantages such as lounge access and hotel upgrades. If you travel frequently, you don’t want to be trapped with a credit card that costs a foreign transaction fee. If you don’t travel frequently, everyday cardholder benefits may be more helpful.
Consider which benefits will be most beneficial to you while shopping for credit cards. Do you want a cash-back credit card, or do you want to accumulate points and miles? Do you want to save money on interest by taking advantage of an introductory 0% APR term, or do you want a sizable welcome bonus?
What about smartphone insurance, trip cancellation insurance, or primary auto rental coverage? The correct credit card can help you earn as you spend, so think about what will be most beneficial to you.
What is the best way to use a credit card to build credit?
The typical amount owed on credit cards is around $5,300. When compared to the typical credit limit given to new credit card users, which is around $1,500, it is a lot. But how did the unpaid credit card balance go to over $5,000?
That can only result from ignorance regarding credit card usage and credit score improvement. People will keep using credit because they believe they can avoid problems. Do you need to learn the best way to use a credit card to build credit and ensure this doesn’t happen? Read on for some quick tips to help you learn more.
- Always make timely payments
- When using a credit card, stick to a budget
- Maintain the lowest possible credit utilization ratio
- Keep your credit cards active
- Limit the number of accounts you open at once
- Try checking your credit score regularly
- Save money for emergencies
Always make timely payments
Making all your credit card payments on time is the best way to use a credit card to build credit. Your payment history is the most important aspect of your credit score, accounting for 35% of your FICO Score, which is used by 90% of top lenders.
A history of on-time payments is an indication to lenders that you’re a responsible borrower, in addition to playing a significant role in generating a high score. Late payments, on the other hand, remain on your credit report for seven years and harm your score.
Make sure to pay the minimum amount due by the due date every month in order to start establishing credit with your credit card. But ideally, you’ll pay off the entire balance on your credit card each month to minimize interest fees. Create automatic payments for the minimum amount due, your bill balance, or another amount you choose so you never forget to make a payment.
When using a credit card, stick to a budget
The opportunity to begin establishing a good credit history and raising your score is provided by receiving your first credit card, which is a significant victory for your credit. But it comes with a lot of responsibility.
The temptation to use a line of credit to pay for items you can’t now afford might be strong when you have access to it because it can feel like free money. But it’s possible to get into debt in this way. Thankfully, you have control over how you use your credit card. Try the following tips:
- Use your credit card like you would use a debit card. Create a budget and calculate how much you can afford to spend each month on several areas such as food, eating, and retail. Then, in addition to that budget, use your credit card to ensure you’re only spending money you can afford to spend.
- Use your credit card for one or two bills per month. Rather than utilizing it for variable expenditure, consider setting up a bill or two to be automatically charged to your credit card. Just make sure to set up autopay for your credit card as well to avoid forgetting to pay the bill.
- Each month, pay off your entire balance. While making the minimum payment on time will maintain your payment history in good shape, paying off your balance in full each month is much better. This assists you in avoiding debt, avoiding interest payments, and maintaining a low credit use ratio (more on below).
Maintain the lowest possible credit utilization ratio
The ratio between the credit you utilize and the credit you have available is known as your credit usage rate. Divide your amount by the credit card’s limit, then multiply the result by 100 to get the percentage that represents your credit card’s credit use.
Your utilization ratio, for instance, would be 20% if you had a $2,000 amount and a $10,000 credit limit. Utilization rates are calculated by credit scoring models for each individual credit card as well as for all of your cards collectively, should you obtain additional cards.
Your credit ratio should be kept as low as possible. Always make sure to keep your ratio below 30%, and for the greatest results, below 10%. Pay off your credit card bill or raise the amount of credit you have available to you to reduce your credit utilization.
Although increasing your credit limit can be advantageous, the ideal approach to using a credit card is to pay the debt in full each month. By doing so, you’ll maintain an extremely low utilization rate, establish a solid payment history, and forgo any interest payments.
Keep your credit cards active
You might be tempted to close an account on one of your credit cards if you aren’t using it frequently. However, if at all possible, it’s advisable to keep your credit accounts open. Your credit history, which includes the average age of your credit accounts, is one factor that contributes to your credit score if you have a lengthy history of appropriate credit management. The average age of your accounts will fall if you close your oldest credit card.
Avoid canceling old accounts, even if you’ve switched to a new card, to boost your credit. To make sure you’re choosing the greatest option for your money and credit, you should, of course, carefully review the terms of your card.
It might be smart to cancel a credit card if you have to pay an annual fee. It is occasionally possible to “downgrade” an annual fee credit card to a different card from the same lender. That can assist you in keeping a credit card open so that your credit is not damaged without having to spend a high cost.
Limit the number of accounts you open at once
Don’t open several credit cards in a short time to prevent increasing the number of inquiries on your credit report, which can make you appear dangerous to lenders. Keeping your accounts open can help the average age of your credit accounts.
Every time you apply for new credit, a hard inquiry is made into your credit reports, which has the potential to slightly lower your credit ratings. Therefore, using the same credit card you first obtained for a while is a good idea. Consider carefully which card to apply for when you’re ready for an upgrade or a card with new features, and try to give each application for a new credit card at least six months’ worth of time in between.
Try checking your credit score regularly
Your credit score will determine the types of credit cards for which you can apply. In order to apply for the appropriate credit cards, it is helpful to know your credit score before you begin the application process.
Whether or not they are cardholders, Discover is one of many credit card companies that provide free credit monitoring tools to everyone who joins up. The FICO credit score, which is used by the majority of lenders, is provided by Discover’s service. You can make use of the service to view your current credit score. Your score can be categorized in one of the following ways, per Experian, one of the three main credit agencies that gather and analyze consumer credit data:
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Very poor: 300-579
Save money for emergencies
People frequently rack up credit card debt as a result of unforeseen events in life, which make it simpler to charge the costs to a card and pay them back later. However, for many people, “later” never actually comes because they are constantly faced with unforeseen bills that are added to their existing debt. Due to this use, your credit card balance will increase, worsening your utilization ratio and lowering your credit score.
A separate emergency fund is the most effective way to end this pattern. In this manner, you can use your credit card to pay for emergency expenses if you’d like to (especially if you’ll get rewards from doing so), but you can also pay the charges back immediately and avoid getting into a debt cycle.
How long does it take to build credit?
You can create a FICO score by following the instructions on the best way to use a credit card to build credit above for six months. If your issuer provides a free credit score, you can observe an increase in the number each month. Additionally, free academic results are accessible online.
Naturally, for this to function, your card activity must be reported to the credit bureaus. Before applying for a certain card, call the lender to make sure they disclose your payment history to all three credit bureaus if it is unclear whether they do so. Keep trying, and be persistent. By using credit cards responsibly, you may establish a strong credit history and a high credit score over time.
Can you build credit without a credit card?
When establishing a solid credit history, a credit card might be helpful. Additionally, if you pay off the balance on your credit card each month, the account gives you a chance to establish credit without incurring debt, which is a win-win situation.
However, credit cards are not the only means of establishing credit. Perhaps you’d want to build credit in a different way. Maybe you already have a few credit cards open and want to diversify the types of accounts on your credit report. Here are a few extra credit-building possibilities to think about in any circumstance.
- Loans of other forms. Making payments on student loans, vehicle loans, or personal loans will help you improve your credit.
- Experian boost. This is a free service provided by the credit bureau Experian to assist people with poor credit scores or little credit history in establishing credit. Experian Boost allows you to build credit and perhaps improve your credit score by making payments that would not ordinarily count toward your credit histories, such as Netflix, utilities, and phone bills. The catch is that you’ll only be accumulating credit history with Experian, not the other two bureaus.
- Credit builder loans. A credit builder loan, like a secured credit card, requires you to make a deposit into a savings account or certificate of deposit (CD). You will then make loan payments in installments, which will be recorded to credit bureaus.
Obtaining your first credit card and responsibly using it opens the door to other borrowing opportunities over time, such as assisting you in building good credit, especially if you opt for the best way to use a credit card to build credit. However, keep in mind that establishing credit takes time.
When possible, use your credit card on a regular basis and pay off your balance in full each month. Additionally, avoid creating multiple accounts or utilizing credit cards to finance major expenditures that you may be unable to return within the grace period.
When you’re ready for a new card, seek one that you’re likely to qualify for to prevent extra inquiries, and choose a card that fits your needs, such as a travel rewards card or one with a 0% introductory APR term.
If you’re worried that having a credit card would lead to the temptation to overspend, consider putting a tiny, regular fee on it, setting up autopay, and then locking it away. You won’t risk building a significant amount this way, but you will still profit from monthly spending and payments being reported to the bureaus.