They say Rome wasn’t built in a day, and so is credit. There are many ways of building credit, and using a credit card is one of the best and fastest ways. Although this might seem backwards considering you need some type of credit to get a credit card in the first place, there are ways. Here are just some of the few ways of using a credit card to build credit.
1. Check your Credit Reports & Score(s)
Not only is it a good idea to check your credit report and know your scores, but also the type of credit card you get approved for will depend on your scores. There are many types of credit cards available in the market. There are secured cards, rewards cards, student cards, and just plain cards that have no rewards in the form of cash back, miles, or points. Learning about credit score ranges and where you fall is very important, especially so you can apply for the right card. For instance, if you have a poor/fair credit score, secured cards might be your best and sometimes only option. Additionally, knowing the factors that determine your credit score is equally important. This way you have a lot of options and know what to do in order to improve your credit score.
2. Choosing a credit card
Depending on where you are in your credit build journey, a secured card might be your best and only option. However, the downside is that secured cards need a down payment. Should you default, the issuer just keeps your deposit. Although there is a deposit, secured cards work just like any credit card. They report to credit bureaus and some will even upgrade to an unsecured card. One of the best secured cards in the market is the Discover it Secured. It earns 2% cash back, will match all the cash back earned during your first year, plus access to your FICO 8 credit score.
3. Start with one credit card
Too many credit cards in rotation can lead to disaster. Unless you’ve had a credit card(s) in the past, managing and affording more than 1 can prove to be too much at times. In fact, too many inquiries (from card applications) on a credit report could signal financial trouble to creditors. Start with 1, pay it off in full monthly, and watch your credit score and report get better. We list opening up too many credit cards as one of the bad credit card habits to avoid. Easy does it!
If you want AND can afford to add more cards to your wallet, it’s always a good idea to apply within at least 6 months of each other.
4. Make bill payments on time
Always, always make at least the minimum payment ON TIME! To avoid missing payments on bills, set up Automatic Payments to at least pay the minimum by the due date. Payment history is the single most important factor that goes into your credit score calculation (at 35%). A missed payment of 30 days can negatively affect your score, but a 60/90 day missed payment, collections, bankruptcies can all be detrimental to your credit. Finally, these negative factors stay on your credit report for seven years, although their effect fade over time.
5. Keep purchases within your budget
Never spend more than you can afford. A credit card is simply a loan and not a free pass to spend even more money. Ideally, you want to keep it at a level where you can pay the balance in full or risk padding even more debt in interest. And interest compounds!!
6. Keep old credit cards open
Again this is dependent on where a person is on their credit journey. However, if you do have credit cards open AND in good standing, keep them open. Lenders want to see how long you have been responsible with accounts. The length of your credit history account for 15% of your credit score! Obviously, if someone is starting from no credit, there is nothing that can be done!