How to Use a Credit Card to Build Credit

Getting a credit card—and using it wisely—can be one of the best ways to build a solid credit history, especially at a young age. But that's not only true if you are just starting out, but also if you've had some financial difficulties in the past and need to rebuild your credit.

In today’s world, having good credit matters more than ever. A strong credit score can mean better rates when you want to take out a car loan or home mortgage. It can help in renting an apartment because the landlord may check it. And many employers look at credit scores when deciding whether to hire job candidates. Insurers may use them, too, in setting your premiums.

Key Takeaways

  • A credit card is one of the easiest ways to build (or rebuild) your credit history.
  • If you don't qualify for a regular credit card yet, there are other options, such as secured cards and store cards.
  • Once you get a credit card, be sure to pay on time and try to keep your "credit utilization ratio" under 30%.

Bear in mind that debit cards, while convenient, are of no help in building your credit history. That's because they don't involve credit (you're just spending your own money), and banks typically don't report that activity to the major credit bureaus. Here are three simple ways to use a credit card to build credit.

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Become an Authorized User 

The most straightforward way to build your credit is by taking out a credit card in your own name and paying it down each month. But acquiring a card with reasonable interest rates can be tricky when you have no previous credit history. Some companies have special cards for college students, but these also have requirements many young people may have trouble meeting, such as demonstrating that they have a reliable source of income.

Additionally, the Credit Card Accountability, Responsibility and Disclosure Act of 2009—a.k.a. the CARD Act—made it more difficult for younger Americans to get their own plastic. An applicant younger than 21 years of age has to show proof that the financial means to handle their debt or get a parent (or spouse) to co-sign before becoming eligible for a card.

There is one easier way around this conundrum—ask to become an authorized user on your parent’s card. While that is a common first step into the world of credit, there are some potential hazards to consider. Your credit score will get a boost if mom or dad pays the bill consistently. But if they don’t, your FICO score—a number that's derived from your credit history—will get bruised, just like theirs.

Keep in mind that the primary account holder is responsible for the entire balance, regardless of who incurred the charges. So if you ask a parent to become an authorized user on their card, make sure you have a clear, mutual understanding of how much you can spend each month.

Using a credit card can help you build a credit history while using a debit card will not.

Start with a Secured Credit Card

A secured credit card is "secured" by the money you deposit into a special bank account. Typically, the credit limit on your card is based on the amount of that deposit. With some cards, the required deposit may be as low as $200 or $300.

Secured cards limit the lender's risks and also help consumers who might be tempted to go wild with a regular credit card stay within their means.

If your bank reports your payments to one or more of the three major credit bureaus, and your credit record is otherwise unblemished, you may have enough of a history to apply for a regular credit card after six months or so. 

What's more, once you've demonstrated that you can be counted on to make your monthly payments on time, your secured card lender might be willing to "graduate" you to one of their unsecured cards if you ask. You may want to look for that provision if you're shopping for a secured card. Also, compare the annual fees and other charges on any cards you're considering.

Even with these kinds of cards, the CARD Act still applies. So if you’re between the ages of 18 and 21, you’ll probably need to demonstrate that you have a source of income and document your expenses.

Apply for a Store Card

If getting a standard credit card proves difficult, another option is applying for a store credit card, which many retailers offer for use in their own stores. These cards are generally easier to obtain for people with little or no credit history. They tend to have higher-than-average interest rates, but that won’t matter much if you carry a low balance or pay it in full with each billing cycle.

Other Important Considerations

Even if you find it relatively easy to get a credit card, don't get too many. Having more cards than you need won't help your credit score and may actually hurt it, according to Fair Isaac Corp., which computes FICO scores.

Also, whichever type of card (or cards) you sign up for, be sure to keep an eye on your credit utilization ratio. That's the percentage of your available credit that you're currently using. Generally speaking, a credit utilization ratio of 30% or less is considered ideal. So, for example, if you have a total credit limit of $10,000 on your cards, try not to owe more than $3,000 on them at any given time.

What's an authorized user?

This is someone with with permission to use another person's card. They are added to the account by the primary cardholder. The authorized user's credit score will get a boost when the primary holder pays the bill consistently. But if they don’t, the authorized user's FICO score will get dinged. If you become an authorized user, be sure to have a clear, mutual understanding of how much you can spend each month.

What Is a secured card and how does it work?

Secured credit cards resemble regular credit cards with one key difference: They require a “security” deposit, the size of which determines your credit limit with the card, at least initially. The advantage to this card type, compared with using a debit card tied to a checking account or a prepaid debit card, is that account activity is reported to all three major credit bureaus (because a secured credit card is a true credit card with a real credit limit). That reporting allows you to begin building a credit history; assuming it is positive, in time, it should allow you to get a regular credit card and other credit products, such as loans.

What's your credit utilization ratio?

This number is very important to maintaining good credit. It's the percentage of your available credit that you're currently using. Generally speaking, a credit utilization ratio of 30% or less is considered ideal. So, for example, if you have a total credit limit of $10,000 on your cards, try not to owe more than $3,000 on them at any given time.

Bottom Line

Without credit history, getting a card will be difficult. A credit card is one of the easiest ways to build (or rebuild) your credit history. If you don't qualify for a regular credit card yet, there are other options, such as secured cards, student cards and store cards. Once you get a credit card, be sure to pay on time and try to keep your "credit utilization ratio" under 30%.

Article Sources
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  1. Federal Trade Commission. "Credit Card Accountability, Responsibility and Disclosure Act of 2009."

  2. Experian. "Credit Card Authorized User: What You Need to Know."

  3. Fico. "FICO score."