How To Build Credit With A Credit Card – Forbes Advisor

To build credit, you need to get credit — and opening a credit card account can be one way to achieve that goal. You may find that qualifying for a credit card with no credit history is a difficult, if not impossible, task. But that doesn’t have to be the case if you know where to start.

Filling out applications for premium rewards credit cards is probably not the best place to start your credit-building journey. Generally, these types of accounts require good to excellent credit for approval. But you can always revisit the premium credit card idea later once you’ve built a positive credit history and good credit score.

But even as a newcomer to the world of finance, you have options. There are several ways to open a credit card account that can help you build your credit.

Ways to build credit with a credit card

Secured Credit Cards

Opening your first credit accounts can be difficult. Some lenders may be concerned about the risk of doing business with someone who has no credit management experience. A secured credit card offers a solution to this problem by reducing the associated risk for the credit card issuer.

When a credit card company approves you for a secured credit card, you make a deposit to open the account—usually equal to the credit limit you get for the new account. Your deposit “secures” the account and serves as security for the credit line.

On paper (aka your credit report), a secured credit card looks just like a traditional credit card account. As long as the credit card company reports the account to the big three credit bureaus and you manage the account responsibly, a secured card can offer solid credit-building potential.

Unsecured Credit Cards

If paying a deposit to open an account doesn’t appeal to you, you can apply for a traditional unsecured credit card instead. And while certain unsecured credit cards may not be a good fit for you right now with limited or no credit history, some options could serve as your first credit card to build credit.

It is important to note that unsecured credit cards with no credit or limited credit history may have higher interest rates and fees. So if you’re going down this route, you should shop around to find the best deal available. Depending on your situation, student credit cards may also be worth considering.

On the plus side, a higher credit card APR doesn’t have to be a deal breaker. You can use your credit card’s grace period to avoid paying interest. You may even find unsecured no-credit credit cards that offer limited rewards for your spending.

Authorized User Status

The authorized user method is a third way to use a credit card to build a credit history. With this approach, you don’t have to open a new credit card yourself. Rather, you are asking a loved one to add you as an authorized user to their existing credit card account.

Many credit card companies share monthly account updates with the credit bureaus for both primary cardholders and authorized users. If the account your loved one is adding you to shows up on one of your Equifax, TransUnion, or Experian credit reports, this could help you determine your credit history.

It’s important to ensure that your friend or family member adds you to a credit card account with a positive payment history (and preferably a low balance-to-limit ratio). If a credit card with delinquencies or a high credit utilization rate shows up on your credit report, even as an authorized user, it can create a credit problem rather than a solution.

Credit card management tips

Every credit obligation that shows up on your credit report — including credit cards — can either help or hurt your credit score. And it’s how you manage your credit cards that determines whether their impact on credit scores is positive or negative.

Here are three rules to follow when it comes to your credit card accounts.

1. Never pay late

Payment history is one of the most important factors that determine your creditworthiness. With FICO® Scores, payment history accounts for 35% of your credit calculation.

Late payments can stay on your credit report for up to seven years. As long as these late payments are on your report, they can hurt your credit score—especially in the beginning. Recent late payments can have a serious negative impact on your credit score.

2. Always pay in full

There are two reasons why paying off your credit card balance every month is an important habit to develop. First, by paying your statement in full by the due date, you can avoid paying expensive interest charges.

The average interest rate is 16.17% (based on February 2022 Federal Reserve data on accounts that rate interest). And the APR on some credit cards can be higher than average. It is wise to point out how to avoid these high interest costs.

The second reason you want to cash out your entire credit card balance each month has to do with credit card usage. Credit utilization measures the relationship between your credit card balances and limits. When you use a higher percentage of your credit card limits, your utilization rate goes up and your credit score goes down in response. Keeping your credit card balance low relative to your credit limit can be good for your credit score.

3. Don’t apply for too many new accounts at once

You should also avoid applying for too many accounts in a short period of time. If you make this mistake, those new credit card applications could hurt your credit score (at least temporarily).

Credit scoring models like FICO and VantageScore take into account how often you apply for new credit. (Seeking lots of new loans at once can indicate increased credit risk.) But if you stagger your new funding requests, you should be fine. Credit inquiries (aka records of when a lender reviews your credit report) only affect your FICO® score for up to 12 months.

Alternative ways to build credit

A credit card can be useful if you want to establish a positive credit history. Additionally, if you pay off your credit card balance every month, the account gives you the opportunity to build credit without going into debt—a win-win situation.

However, credit cards are not the only way to build credit. You may prefer to establish credit in a different way. Or maybe you already have a few open credit cards and want to diversify the mix of accounts on your credit report. In both scenarios, here are some other credit building options to consider.

Credit Builder Loans

A credit builder loan may be suitable for some people who want to build or restore their credit history. Instead of receiving your loan proceeds up front, the lender keeps your funds and puts them in a separate savings account. In the meantime, you make payments every month until you pay off the balance of the loan in full.

Once you make your final payment, the lender will release the loan proceeds to you (less any fees you owe). Home loans aren’t free, but some deals can be an affordable way to get a loan. Simply compare interest rates and fees from multiple lenders as you would any other type of financing.

You should also make sure that the lender reports the Schufa loan to the credit bureaus – preferably all three – before you submit an application. Otherwise, the account cannot help you build credit. If the lender reports the account and you always pay on time, your lender loans should help you build a positive credit history.

Experian Boost

Experian, one of the three major credit bureaus in the United States, offers a free service that can help you with borrowing. When you sign up for the Service (aka Experian Boost), you give Experian permission to access your bank account and/or credit card information.

Once it has access to these accounts, the credit bureau uses software to look for suitable telecom, utility, and subscription services. The system can then add any eligible accounts it finds to your Experian credit report — giving you the ability to include a more positive payment history on your credit report.

According to Experian, the average consumer with a “thin credit record” experienced a 19-point increase in their FICO® score from using the service. However, it’s important to note that this strategy won’t help you build credit with all three credit bureaus.

rental reporting

Another out-of-the-box way to add an alternative credit history to your credit report is the rental report. Although most rental managers and landlords do not report rent payments to the credit bureaus, some do. It’s worth asking.

There are also companies that you can pay for rental reporting services. These companies collect rent payment history from your landlord or bank account information and provide it to one or more credit reporting agencies on your behalf.

bottom line

Credit cards offer many benefits that could improve or expand your financial life. The potential to build good credit with credit cards is one of the top reasons you should consider applying for an account.

However, it’s important to remember that how you use credit cards will determine whether they’re good or bad for you in the long run. If you avoid overspending and can pay off your balances in full each month, a credit card could be a solid credit-building strategy. But if you think you’re going to have trouble using credit cards with restraint, you might want to consider a different approach to building credit for now.