How To Build Credit With A Credit Card: The Complete Guide
If you're new to the world of credit, you might be intimidated by the idea of opening your first credit card. To some people, credit cards represent a gateway to overspending and debt.
But there's a big difference between treating a credit card like free money and using your card responsibly.
The former can put you in serious financial peril, while the latter can actually offer a number of benefits, like helping you establish credit, boosting your credit score, and making it possible for you to qualify for bigger purchases in the future.
Here's what you need to know about using a credit card to build credit.
Check your credit score and reports for free
First, you need to know where you're starting from.
Before you start applying for credit cards, it's important to check your credit score and order your credit reports.
As we've stated in the past, our preferred method for checking credit scores is the Discover Scorecard—a free service offered by Discover, and you don't need to sign up for a Discover card to take advantage of it.
There are truly no strings attached, which makes this a no-brainer for checking your credit score. Check out our step-by-step guide to getting your credit score in five minutes to get started.
Once you know your credit score, your work is only half done—that's because you also need to review your credit reports before you apply for a credit card. If your score is low, the information in your credit report should tell you why.
Read through your credit report carefully, looking for any errors, late payments, or collection accounts—three things that can sink your score.
Fortunately, ordering your credit report won't cost you anything.
Under federal law, you're entitled to one free credit report from all three major credit bureaus every 12 months. See our guide to getting your free credit report for details on how to order yours.
What if you don't have a credit history?
If you're just starting out, or you've never used credit of any kind in the past, you might not have a credit history—which means you won't have a credit score, either.
This is a challenge, but it's not an insurmountable one. After all, everyone has to start from somewhere.
In this case, you might need to start with a secured credit card, or become an authorized user on another person's card.
We'll cover both of these options in detail below.
What if you have negative items on your credit report?
There's a difference between having zero credit and having a bad credit history. It's much easier to start from scratch than to rebuild your credit after years of damage and misuse.
If negative items are keeping your credit score low, you might be better off working on removing them before you apply for a new credit card.
Each application you submit counts as a hard inquiry on your credit report, and enough of these can hurt your credit score.
If you know you're likely to get turned down for a card, it's worth focusing your efforts on cleaning up your credit report and boosting your score before taking on any new credit.
Different options for choosing your first credit card
So you know your credit score, and you've reviewed your credit reports. Congratulations!
You're ready to apply for a new credit card.
But which one should you pick?
Here's where you have a few different options. The one that works best for you will depend on your credit history and your score.
Look for pre-qualified offers
If this is your first credit card, you might think it's best to jump right in and start filling out a bunch of applications. But this can be a bad move.
Each time you apply for a new credit card (or any type of credit), it counts as a hard inquiry on your credit report. Before the lender will agree to give you a credit card, it wants to know exactly what kind of shape your credit is in.
And if you rack up too many hard inquiries, it will pull down your score.
However, soft inquiries don't hurt your credit score. Because pre-qualification offers count as soft inquiries, you don't have to worry about them impacting your score.
If you've received a pre-qualification letter in the mail, like the Mercury Mastercard, this doesn't mean you're guaranteed to get a card. But it's an indication the lender has done a soft review of your credit and thinks you might qualify if you apply.
Of course, pre-qualification offers don't always appear in your mailbox. In that case, you can check credit card websites for available pre-qualified offers.
For example, American Express lets you run a search with a few basic pieces of information.
Become an authorized user
If you don't have any credit history to speak of, you can piggyback on someone else's by becoming an authorized user on another person's credit card—usually a parent or other close relative.
Before you become an authorized user, there are a couple things you need to check out.
First, make sure the account holder has a good credit score and positive payment history. You don't want to hurt your credit score by getting dinged by the cardholder's credit mishaps.
You'll also want to confirm that the lender reports your activity to the credit bureaus. Not all lenders report authorized user activity, so ask before you sign up.
Apply for a secured credit card
Another option for building credit is applying for a secured credit card. Unlike a regular, unsecured credit card, a secured card requires you to offer collateral in the form of an up-front cash deposit.
You can think of this up-front payment as you might a security deposit for an apartment.
With an apartment, the landlord only dips into that money if the tenant leaves damage behind. Otherwise, the tenant gets the money back when their lease runs out.
Likewise, the lender only keeps your deposit if you miss a payment on your credit card or stop paying altogether.
Most secured credit cards come with a low credit limit—the idea is to charge a little each month and immediately pay it off. This way, you build a positive credit history that shows future lenders you're responsible.
Apply for a store card
You can also consider getting a store credit card. Also known as retail cards, these are the store-specific credit cards you find at places like Old Navy and JC Penney.
These days, most retailers offer their own credit cards, so you have a lot of choices if you want to go this route.
Store cards might be easier to qualify for, but they tend to come with lower limits.
Also be wary of high interest rates and annual fees. In many cases, store cards only allow you to charge items in their stores.
Apply for a student credit card
If you're a college student, you might qualify for a student credit card. Student credit cards are exactly like any other credit card, but they tend to come with lower credit limits.
Because they're marketed toward young people, and lenders assume these borrowers don't have much of a credit history, it's usually a bit easier to qualify for a student card.
Student credit cards can come with a few perks, too.
For example, some cards let you earn rewards and cash back on purchases. You can also find cards that pay you a small bonus for maintaining a certain grade point average.
Try using a credit union
If you've struck out on qualifying for a credit card from one of the major card companies, try talking to a credit union.
As with student credit cards, there aren't any real differences between a card issued from a major card lender versus a credit union. But you need to be a member of the credit union to apply for one of their cards.
In most cases, credit unions limit their membership to certain professions or groups—but some are quite lenient when it comes to membership qualifications.
For example, if your parent belongs to a credit union, you probably already qualify for membership.
Unlike banks, credit unions answer to their members, not shareholders.
This means they tend to offer more favorable terms and interest rates on things like loans and credit cards.
As a bonus, your credit union is more likely to offer you a car loan or mortgage if you already have a credit card through them.
Tips for using your credit card once you're approved
Once you're approved, you can start using your credit card to build credit right away.
This is something that requires a firm commitment to financial responsibility, as well as a knowledge of what not to do when it comes to your new card.
Here are five tips for getting the most credit-building benefits out of your new card.
Pay on time and in full
Using a credit card can help you improve your credit score, but misusing your card can make your score plummet. This is because your payment history makes up 35 percent of your credit score.
Avoid late payments by staying on top of your statement, as well as your payment due date. You can also enroll in autopay to make sure you don't overlook a payment deadline.
You should also make it a goal to pay your entire balance in full each month. Otherwise, you'll end up paying interest on your purchases.
If you pay off your card every month, you're basically getting an interest-free loan from your lender every billing cycle. This makes your card free to use.
Keep your balances low
Besides charging you interest, maintaining a balance on your credit card can damage your credit score by raising your credit utilization rate.
Your credit utilization is the ratio of how much credit you use compared to your total available credit. This figure accounts for 30 percent of your credit score, so it's easy to see how a high credit utilization can drag down your score.
Ideally, you want your credit utilization rate to be 30 percent or lower. For example, if your credit card has a $1,000 limit, you want to keep your balance at $300 or below.
Keep your account open (even if you stop using the card)
Having a credit card allows you to build a credit history—but only if you have an existing account. While you might want to stop using your card at some point, you should keep your account open.
When you close your credit card account, you deprive yourself of valuable credit history. Because your credit history makes up 15 percent of your credit score, it's important to keep accounts open whenever you can.
Upgrade to a better card as your score improves
If you're starting out with little or no credit history, you probably won't qualify for a card with a high credit limit, which is perfectly okay and probably to be expected. Over time, your card lender might extend you more credit, which can help boost your credit utilization.
If your lender won't give you more credit, wait until your credit score improves, and then upgrade to a card with better terms and a lower interest rate.
Just be careful not to apply for too many cards within a short period of time. Remember that credit card applications count as hard inquiries on your credit report, and having too many of these can drag down your score.
Additionally, the amount of new credit you carry makes up 10 percent of your credit score. If you get several new credit cards at once, this can be a red flag to lenders that you're in financial trouble.
Check your reports and score regularly
You should also keep an eye on your credit score and your credit reports.
Use free tools like the Discover Scorecard and annualcreditreport.com to conduct regular reviews of your score and reports.
This way, you can spot any problems right away and take immediate steps to resolve them.
Why credit cards are a good option for building your credit
Used properly, credit cards are an excellent way to build your credit.
In addition to offering rewards and bonuses, credit cards make it possible to purchase items you wouldn't ordinarily be able to afford.
When you pay off your card on time each month, you also show future lenders that you're trustworthy.
Over time, this positive payment history will raise your credit score, paving the way toward things like car loans and a mortgage.
About the Author
Mike is a recognized credit expert and founder of Credit Takeoff. His credit advice has been featured in CNBC, Investopedia, CreditCards.com, Bankrate, Huffpost, The Simple Dollar, Reader's Digest, LendingTree, and Quickbooks. Read more.