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Credit cards can help build or repair credit, but with great power comes great responsibility.
Good credit is important — even necessary — for making major purchases and avoiding high interest rates. Maintaining a good credit score and a solid credit history means you can be trusted to repay your debts and make good on your financial obligations. In turn, financial institutions are more likely to lend you money to finance big-ticket items like a house or vehicle.
Your creditworthiness is based on your credit history and credit score. Building your credit helps prove your ability and track record for repaying debt, and makes it easier to qualify for better financing with more favorable terms.
But what if you don’t have any credit to begin with or need to repair your poor credit history? Building credit with a credit card is an effective means of establishing or improving your credit, but doing so requires practicing good credit habits.
Your credit score doesn’t start at zero or even 300 (the lowest possible FICO credit score). By default, you simply don’t have any credit history. This can be frustrating: without any credit history, it’s difficult to apply for financing without a cosigner or co-borrower.
Your credit history begins once you’ve established some form of credit. This occurs when you take out a loan, such as a student loan or car loan. You can also use credit cards to establish credit and prove your creditworthiness.
Credit card accounts, loans, and other types of debt are reported to the three major credit bureaus (Equifax, Experian, and TransUnion) and compiled into a credit report that includes your:
This information is used to determine your creditworthiness and credit score. The higher your credit score, the more likely you are to qualify for new credit and better payment terms (such as higher credit limits and lower interest rates).
Credit cards are a type of revolving credit in which you can continually borrow money against a credit limit without any set end date.
As you use the card and accumulate a balance, your available spending limit decreases. When you make a credit card payment, the available spending limit increases once more based on your total payment (to the maximum credit limit “cap”).
Building credit might seem challenging at first, especially if your credit is damaged or nonexistent. Fortunately, there are many ways to build credit with a credit card, whether you’re just starting or working to improve your creditworthiness.
Primary cardholders — such as a family member or partner — can add you to their credit card as an authorized user. An authorized user is someone with permission to use another’s credit card, but who isn’t responsible for paying the credit card.
Credit activity is reported on both the primary cardholder’s credit history, as well as the authorized user’s history. Details such as on-time payments, low credit utilization, and the total outstanding balance could be recorded on your credit report just as they are for the primary cardholder.
This reflects well on your credit report and helps establish and build your credit. However, this can be a bit of a double-edged sword. Though some negative information, such as missed or late payments, might not be reported in your credit history, a high balance or high credit utilization could.
In other words, be selective about who you ask to add you as an authorized user. Choose someone responsible who you can trust to pay their credit card bill on time and isn’t likely to max out their credit limit.
Credit cards, like most types of credit, come in two flavors: secured and unsecured. When you apply for an unsecured card, credit card issuers rely entirely upon your credit history to determine if they’ll approve or reject your application.
With a negative or nonexistent credit history, banks need a way to mitigate the risk you present. In these situations, you might be able to apply for a secured credit card.
Secured credit cards require a cash deposit as collateral when opening the account. This deposit serves as your credit limit and provides the bank with a means of reducing the risk you pose.
Secured credit cards function the same as unsecured credit cards; your credit activity is still recorded on your credit report. As a result, secured credit cards can help you build or establish credit, even if you have a limited or poor credit history and can’t otherwise qualify for a credit card.
College students often have little or no credit history. But because you’re beginning the journey into the wonderful world of adulting, there are plenty of reasons you might find a credit card beneficial, even just for emergencies.
Some credit card companies offer student credit cards to those who qualify. Student credit cards are typically unsecured, meaning they don’t require collateral, but a cosigner or proof of income might be required.
Using a student credit card responsibly builds your credit history and improves your creditworthiness. However, student credit cards might have some limitations that regular credit cards don’t, such as low credit limits. They could also have a higher APR than a regular credit card.
On the flip side, a student credit card could entitle you to some special benefits, such as statement credits for maintaining a certain GPA, on top of traditional perks, like cash-back.
Your payment history makes up 35% of your credit score. This means you should prioritize paying your credit card bill on time and not missing any payments.
Your payment due date always falls on the same date each month and is found on your monthly billing statement. This makes it simple to budget for your monthly bill, though your minimum payment amount can fluctuate from month to month. If your initial payment date doesn’t work for you, many credit card issuers allow you to request a change to your billing date.
To help you stay on time with payments, most credit card providers allow you to set up automatic payments. You can also set up payment reminders in your calendar app, especially given the importance of making your credit card payments on time.
Fifty-five percent of Americans carry credit card debt from month to month. Though this isn’t bad by default, it’s not ideal, either. Carrying a statement balance between billing cycles means you’re on the hook for interest fees. And with limited or poor credit, your card’s APR is likely to be high, which means higher interest fees.
Unless it reduces your outstanding balance to zero, making the minimum monthly payment isn’t enough to avoid interest. Instead, try paying off your credit card balance in full to avoid any interest charges applying to that statement period’s balance.
This is most easily accomplished by never charging more on your credit card than you have in cash. For example, if you have a credit limit of $2,000 but only $500 of cash to spend, don’t charge more than $500 onto your credit card. Then, pay off the card in full using your cash.
The ability to pay your credit card balance on time or in full depends, in part, on your account balance. Your credit card’s minimum monthly balance — the amount you need to pay to be considered on-time — is based on a percentage of your account balance, as well as any interest.
As such, your minimum monthly payment differs from month to month. If your balance is $100, your monthly payment might be $15. However, if your balance is $900, your minimum payment might be $36.
Maxing out your card each month means paying the highest possible minimum monthly payment. And unless you’re paying off the balance in full, you’ll end up paying interest on top of that payment.
Credit utilization is the percentage of available credit you’re currently using across your revolving credit accounts. For example, if you have a total credit limit of $5,000 and have a combined balance of $2,500 across all credit cards and lines of credit, your credit utilization is 50%.
Your credit utilization ratio makes up 30% of your credit score. Typically, lenders consider a “good” credit utilization ratio to be 30% or lower, as higher credit utilization can indicate difficulties with money management.
In addition to paying down your credit card balances, ask your card providers for a credit limit increase once you’ve established a solid credit history. Doing so reduces your overall credit utilization by increasing the limit “ceiling,” though be careful not to make excessive purchases just because you can charge more to your card.
Store credit cards provide some perks or benefits for shopping at a specific retailer or network of retailers. They’re often offered at checkout by a cashier or at the end of an online transaction.
Though they function like other credit cards, store credit cards are sometimes easier to qualify for than a regular credit card. The tradeoff is that they tend to come with a higher APR. They may also be considered “closed-loop” credit cards, restricting use to purchases from that retailer or a specific group of retailers.
Using a store credit card impacts your credit in the same way a normal credit card does, making store credit cards a solid option for building credit — as long as you practice good credit habits as you would any credit card.
Every credit card account you keep open – even if you’re not actively using it – contributes to your total credit limit. As a result, you can more easily maintain a low credit utilization ratio.
However, you might want to close unused credit cards that have annual fees if you’re unlikely to use those cards again in the future. Similarly, if access to unused credit cards tempts you to spend unnecessarily, closing those accounts — or simply cutting up the cards — might help you limit overspending.
Using a credit card to establish or improve your credit doesn’t happen overnight. Building good credit is like a marathon: pace yourself, budget, and live within your means.
If you don’t currently have credit, it should take three to six months before your first FICO score is calculated, though your VantageScore may be available immediately. New items are typically added to your credit report within 30 days.
The length of time it takes to improve or repair bad credit depends on the severity of negative information included in your credit history. As a result, it’s usually easier to build credit from scratch than to repair bad credit.
With budgeting, patience, and understanding, you can use a credit card to jumpstart your credit history or repair damaged credit.
Practice good credit habits by paying your bill on time, managing your credit card use, and monitoring your credit activity. Over time, combining good credit habits with responsible credit card use will help build, grow, and improve your credit. It can also solidify a positive credit history, improving the likelihood you’ll qualify for bigger sources of financing and paving the way for you to accomplish your financial goals.
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