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 might feel like qualifying for a credit card when you have 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 journey. In general, these types of accounts require good to excellent credit for approval. But you can always revisit the idea of ​​the premium credit card later, once you’ve established a positive credit history and a good credit rating.

Yet even as a newcomer to the world of financing, you have options. There are several ways to get a credit card account that can help boost your credit.

Ways to build up credit with a credit card

Secured credit cards

Opening your first credit accounts can be tricky. Some lenders may be concerned about the risk of doing business with someone who lacks credit management experience. A secured credit card offers a solution to this problem by reducing the risk incurred by 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 receive on the new account. Your deposit “secures” the account, serving as collateral for the line of credit.

On paper (i.e. your credit report), a secured credit card looks like a traditional credit card account. As long as the credit card company reports the account to all three major credit bureaus and you manage the account responsibly, a secured card can offer strong credit-building potential.

Unsecured credit cards

If putting down a deposit to open an account doesn’t appeal to you, you might consider applying for a traditional unsecured credit card instead. And while some unsecured credit cards might not be right for you right now with a limited or no credit history, some options could work as a first credit card to build credit.

It is important to note that unsecured credit cards with no credit or limited credit history could carry higher interest rates and fees. So if you go this route, be sure to shop around for the best deal available. Student credit cards may also be worth considering, depending on your situation.

On a positive note, a higher credit card APR doesn’t have to be a deciding factor. You can use your credit card grace period to avoid paying interest. You may even be able to find unsecured credit cards with no credit that offer limited rewards on your spending.

Authorized user status

The authorized user method is a third way to use a credit card to establish a credit history. This approach does not require you to open a new credit card yourself. Instead, you ask a loved one to add you to their existing credit card account as an authorized user.

Many credit card companies share monthly account updates with credit bureaus for primary cardholders and authorized users. If the account your loved one adds you to appears on one of your credit reports from Equifax, TransUnion, or Experian, it could help you build a credit history.

It’s important to make sure 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 outstanding charges or a high credit utilization rate shows up on your credit report, even as an authorized user, it may create a credit score problem rather than a solution.

Credit Card Management Tips

Any credit obligation that appears 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 rating will be positive or negative.

Here are three rules you’ll want to follow when it comes to your credit card accounts.

1. Never pay late

Payment history is one of the most important factors that make up your credit score. With FICO® Scores, payment history counts for 35% in calculating your credit score.

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

2. Always pay in full

There are two reasons why paying off your credit card balance each month is an important habit to develop. First, when you pay off your full statement balance before your account’s due date, you can avoid costly interest charges.

The average interest rate is 16.17% (based on February 2022 data from the Federal Reserve on accounts that assessed interest). And the APR on some credit cards can be above average. Making a point to avoid these high interest charges is wise.

The second reason you want to pay off your credit card balance in full each month has to do with credit card usage. Credit usage measures the relationship between your credit card balances and limits. When you use a higher percentage of your credit card limits, your usage rate increases and your credit score decreases accordingly. Keeping your credit card balance low relative to its credit limit can be good for your credit score.

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

You should also aim to avoid requesting too many accounts in a short period of time. If you make this mistake, these new credit card apps 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. (Looking for a lot of new credit at once can indicate high credit risk.) But if you stagger your new funding requests, you should be fine. Credit inquiries (i.e. records of when a lender checks your credit report) will only impact your FICO® score for up to 12 months.

Alternative ways to build credit

A credit card can be useful when you want to establish a positive credit history. Plus, if you pay off your credit card balance each 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 accumulate credit. You may prefer to establish credit in a different way. Or maybe you already have credit cards open and are looking to diversify the mix of accounts on your credit report. Either way, here are some other credit options to consider.

Credit builder loans

A credit builder loan may be suitable for some people looking to establish or rebuild their credit history. Instead of receiving your loan proceeds up front, the lender keeps your funds and places them in a separate savings account. During this time, you make payments each month until you pay off the loan balance in full.

Once you’ve made your final payment, the lender will return the loan proceeds to you (minus any fees you owe). Credit builder loans aren’t free, but some offers can be an affordable way to build credit. Just be sure to compare interest rates and fees from multiple lenders, as you would with any other type of financing.

You should also confirm that the lender will report the credit builder loan to the credit bureaus, preferably all three, before you apply. Otherwise, the account cannot help you build credit. If the lender flags the account and you always pay on time, your credit builder loans should help you establish a positive credit history.

Experian Boost

Experian, one of the top three credit reporting agencies in the United States, offers a free service that can help you establish credit. When you register for the service (aka Experian Boost), you authorize Experian to access your bank account and/or credit card information.

Once it has access to these accounts, the credit bureau will use software to search for eligible telecommunications, utilities, and subscription services. The system can then add any eligible accounts it finds to your Experian credit report, allowing you to put a more positive payment history on your credit report.

According to Experian, the average consumer with a “thin credit history” experienced a 19-point increase in their FICO® score using the service. But it is important to note that this strategy will not help you establish credit with all three credit bureaus.

Declaration of rent

Another out-of-the-box way to add alternative credit history to your credit report is to create rent reports. Although most rental management companies and landlords do not report rent payments to credit bureaus, some do. Worth asking.

There are also companies you can pay for rent filing services. These companies collect rent payment history from your landlord or bank account data and share it with one or more credit reporting agencies on your behalf.

Conclusion

Credit cards offer many benefits that could enhance or enhance your financial life. The ability to build good credit with credit cards is one of the main reasons you might consider applying for an account.

It’s important to remember, though, that how you handle credit cards determines whether they’re good or bad for you in the long run. If you can avoid overspending and pay off your balances in full each month, a credit card could be a solid credit-building strategy. But if you think you’ll have a hard time using credit cards in moderation, you might want to take a different approach to credit building for now.