How to Use a Credit Card to Build Credit

Tara Seboldt
May 27, 2022

Credit cards have a mixed reputation. Some people think they’re the best way to build credit and make purchases. Others see them as debt traps that should be avoided.

Both ends of the credit card debate have merit, however. Credit cards can be a great way to build your credit score. At the same time, irresponsible use can put you into debt and hurt your score.

This article will show you how to use a credit card to build credit responsibly as well as other methods you can use to build your score.

How Do Credit Cards Affect Credit Scores?

A credit card is a type of revolving credit account, which means that it renews itself as you make payments. This also means your credit card company can then report your payment activity and account status to credit bureaus.

Most credit card companies send an initial report when the credit card account is opened. They then send monthly reports to the three major credit bureaus—Experian, Transunion, and Equifax.

These reports include information about your payment history and current status. Your monthly payment history is reported for up to the last 84 months (seven years).

Your account can be current, meaning you’ve paid your bill on time and have no past-due balances, or it can be delinquent.

Delinquent accounts are generally reported if your payment is 30 days past the due date.

The report also shares your current credit card balance. This is the balance as of the day your credit card bill came out. The credit bureaus use this information to calculate your credit utilization rate, a major factor in your FICO score.

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How to Use a Credit Card to Build Credit

The reports from credit card companies go to the credit bureaus automatically. You don’t have to request that they send the report or contact the credit bureaus. All you have to do is use your credit responsibly over time.

Using credit responsibly means not spending more than you can afford and making your payments on time. In fact, on-time payments are the biggest factor in determining your credit score—a credit history full of on-time payments generally makes for a good credit score.

How a Credit Card Can Hurt Your Credit Score

Using your credit card irresponsibly can hurt your score. Missing payments or making late payments will show up on your credit report and negatively impact your credit score.

Overspending or maxing out your cards can have a negative effect, as well. Part of your FICO score is your credit utilization ratio. Credit utilization is the amount of available credit you have compared to your credit limit. A lower utilization rate helps your score, while a rate over 30% could hurt it.

Do All Credit Cards Build Credit?

Yes, any credit card that’s reported to the major credit bureaus can build credit. The type of card you have doesn’t matter, whether it’s a cash rewards credit card or balance transfer card.

Although all cards build credit, there may be reasons you want to choose one type of credit card over another. For example, a credit-building credit card is designed for someone with no credit or looking to rebuild bad credit. These cards often have lower eligibility requirements on the credit card application.

Secured Credit Cards Vs. Unsecured Credit Cards

Credit cards are split into two categories: secured cards and unsecured cards.

Secured Credit Cards

Secured credit cards require a security deposit to open the account. This deposit is usually the same as your credit limit. If you’re unable to pay your credit card bill, your credit card issuer uses your deposit to cover your balance. You may have to pay an annual fee.

Unsecured Credit Cards

Unsecured credit cards are “regular” cards, meaning you don’t need collateral such as a deposit. They generally have higher credit limits and more perks, like cash back, than secured cards.

Are Credit Cards the Best Way to Build Credit?

Credit cards can be an excellent way to build credit—but they’re not the only way. And a credit card might not be the best way for you to build your score. Let’s look at when you might want to use a credit card for building credit and what alternatives are available.

When to Use a Credit Card to Build Credit

A credit card could be a good credit-building option for someone who has an established credit score. For example, your FICO score is in the mid-600s thanks to an auto loan and student loans. A new credit card could help you round out your credit profile by showing a different type of credit.

Credit cards can also help build credit if you can commit to responsible use. You can easily use your credit card to pay for the things you already need, such as groceries or fuel.

However, you need to make sure you’re committed to paying at least the minimum payment on time each month. If not, you run the risk of a credit card hurting your score instead of helping it.

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Credit Card Alternatives to Help You Build Credit

You don’t have to use a credit card to build your score. If you’re worried about going into credit card debt or don’t want to deal with confusing credit card billing cycles, there are other ways to get excellent credit.

Credit-Building Loans

Credit-building loans are usually short-term, small-dollar loans designed to help you build credit. Many credit-building loans don’t give you your loan funds upfront. Instead, your loan proceeds go into a bank account until you pay back the loan.

Unsecured Loans

An unsecured loan is a loan that doesn’t require collateral, such as a student loan. Most personal loans are unsecured and can be a great credit-building alternative to credit cards. Loans use fixed interest rates and monthly payments, making it easier to budget your bills than a credit card.

For example, Possible offers a short-term installment loan where you can borrow up to $500 instantly. You’ll pay it back over time in four installments. Unlike most credit cards, there are no late fees.

Secured Loans

Like a secured credit card, a secured loan requires collateral. The most common types of secured loans are auto loans and mortgages. These use your car or house, respectively, as collateral for the loan. If you can’t make your payments, your lender can repossess your collateral to cover the cost of the loan.

Lines of Credit

A line of credit, such as a personal line of credit or a home equity line of credit, is revolving credit. You can withdraw money from your credit line up to your credit limit. Like a credit card, you’ll have to pay down your balance to open up more available credit.

How To Use a Credit Card to Build Credit Safely

If you choose a credit card to help you build credit, there are things you can do to try to avoid going into credit card debt. Follow these best practices to help you build credit with a credit card.

Making On-Time Payments

A long history of on-time payments is the best way to improve your credit score. Make sure you make at least your minimum payment by your due date each month to help build credit.

Paying Off Your Balance

Credit card interest rates are notoriously high. But did you know it’s possible to pay zero interest on your credit card?

You simply have to pay your balance in full each month. Interest is only charged on balances that carry over to the next billing cycle. Paying your balance in full allows you to build your credit without paying expensive interest.

For example, your credit card bill is $500. If you pay the minimum payment of $25, the remaining $475 balance will be charged interest. If you pay the full $500 by the due date, you won’t be charged any interest.

Setting Up Autopay

An easy way to protect yourself from missing a monthly payment is to set up autopay on your credit card bill.

However, you want to be sure you’ll have the money to cover your autopay in your account each month.

It’s best to use autopay if you have a steady income and regularly carry extra cash in your bank account.

The Bottom Line

Building credit takes time—regardless of whether you choose a credit card or alternative.

The sooner you get started making on-time payments, the sooner you’ll see positive impacts on your score.

This will ultimately better your financial health and open more doors for for you in the future. 

Tara Seboldt

Tara is a financial writer with over five years of professional writing experience. She previously worked at a financial planning firm. Tara uses this professional experience to help readers better understand their finances and make smart financial moves. When she’s not writing about money, Tara enjoys spending time in the Idaho mountains hiking, camping, and skiing.

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