How to Use a Credit Card to Build Credit

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How to Use a Credit Card to Build Credit

Obtaining a credit card—and using it wisely—can be one of the most effective methods to establish a healthy credit history, particularly at a young age. That is true not just if you are just starting out, but also if you have had financial problems in the past and need to repair your credit.

Having excellent credit is more important than ever in today’s environment. A good credit score might imply lower interest rates when applying for a vehicle loan or a house mortgage. It may be useful when renting an apartment since the landlord may inspect it. In addition, many firms use credit ratings when choosing whether or not to hire job prospects. Insurers may also use them to determine your rates.

Key Takeaways

  • A credit card is one of the most convenient methods to establish (or repair) your credit history.
  • If you don’t yet qualify for a conventional credit card, you might consider secured cards and store cards.
  • Once you get a credit card, be sure to pay on time and maintain your “credit usage ratio” below 30%.

Remember that, although debit cards are handy, they will not help you develop your credit history. This is because they do not entail credit (you are just spending your own money), and banks do not normally report such activity to the main credit agencies. Here are three straightforward methods for using a credit card to improve credit.

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Become an Authorized User

The simplest strategy to develop credit is to get a credit card in your own name and pay it off each month. However, obtaining a card with acceptable interest rates might be difficult if you have no past credit history. Some firms provide special cards for college students, but they also have conditions that many young people may struggle to achieve, such as establishing a stable source of income.

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Furthermore, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, sometimes known as the CARD Act, made it more difficult for younger Americans to get their own credit cards. 1 Before being eligible for a card, an applicant under the age of 21 must demonstrate evidence of financial capability or get the co-sign of a parent (or spouse).

There is an easier way out of this bind—ask to be included as an authorized user on your parent’s credit card. 2 While this is a usual initial step into the world of credit, there are certain risks to be aware of. If your parents routinely pay their bills, your credit score will improve. But if they don’t, your FICO score—a figure drawn from your credit history—will suffer the same fate as theirs. 3

Remember that regardless of who incurred the charges, the main account holder is accountable for the total sum. So, if you ask a parent to become an authorized user on their card, make sure you both agree on how much you may spend each month.

A credit card may help you create a credit history, however a debit card cannot.

Start with a Secured Credit Card

The money you put into a designated bank account “secures” a secured credit card. The credit limit on your card is usually determined by the amount of your deposit. The necessary deposit for certain cards may be as little as $200 or $300.

Secured cards reduce the lender’s risks while also assisting customers who may be tempted to overspend with a standard credit card to remain within their means.

If your bank sends your payments to one or more of the three main credit agencies and your credit history is otherwise clean, you may have enough of a history after six months or so to apply for a conventional credit card.

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Furthermore, after you’ve proved your ability to make on-time monthly payments, your secured card lender may be happy to “upgrade” you to one of their unsecured cards if you ask. If you’re looking for a secured card, you should check for that provision. Compare the yearly fees and additional charges on any cards you’re thinking about getting.

The CARD Act still applies to these types of cards. So, if you’re between the ages of 18 and 21, you’ll most likely need to provide proof of income and log your spending.

Apply for a Store Card

If obtaining a normal credit card proves challenging, another alternative is to apply for a store credit card, which is offered by numerous shops for usage in their own stores. People with little or no credit history will find it simpler to get one of these cards. They feature higher-than-average interest rates, but that won’t matter if you have a modest amount or pay it off in full at the end of each billing cycle.

Other Important Considerations

Even though getting a credit card is pretty straightforward, don’t acquire too many. According to Fair Isaac Corp., which computes FICO ratings, having more credit cards than you need will not boost your credit score and may possibly harm it.

Also, regardless of the sort of card (or cards) you choose, keep an eye on your credit usage ratio. That is the current proportion of your available credit that you are utilizing. A credit utilization ratio of 30% or less is generally regarded as acceptable. So, if your total credit limit on your cards is $10,000, try not to owe more than $3,000 on them at any one moment.

What’s an authorized user?

This is someone who has been granted authorization to use another person’s card. The principal cardholder adds them to the account. When the principal holder pays the payment on time, the authorized user’s credit score improves. If they do not, the authorized user’s FICO score will suffer. If you become an authorized user, make sure you both agree on how much you may spend each month.

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What Is a secured card and how does it work?

Secured credit cards are similar to conventional credit cards but for one important difference: they demand a “security” deposit, the amount of which sets your credit limit with the card, at least initially. When opposed to using a debit card linked to a checking account or a prepaid debit card, the benefit of this card type is that account activity is reported to all three major credit agencies (because a secured credit card is a true credit card with a real credit limit).That reporting enables you to start creating a credit history, which, if good, should allow you to receive a normal credit card and other credit products, such as loans, in the future.

What’s your credit utilization ratio?

This number is critical for keeping excellent credit. It is the portion of your available credit that you are now using. A credit utilization ratio of 30% or less is generally regarded as acceptable. So, if your total credit limit on your cards is $10,000, try not to owe more than $3,000 on them at any one moment.

Bottom Line

Obtaining a card without a credit history will be challenging. A credit card is one of the most convenient methods to establish (or repair) your credit history. If you don’t yet qualify for a conventional credit card, alternative possibilities include secured cards, student cards, and shop cards. Once you get a credit card, be sure to pay on time and maintain your “credit usage ratio” below 30%.

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