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How To Use A Credit Card To Build Credit

Looking for the best credit cards for building credit? Before you start responding to every application you get in the mail, it's important to know how to use a credit card to build credit, as it can be easy to get caught up in the buying power you get with fresh plastic. 

Being strategic about using a credit card to build credit may help you boost your numbers quickly. But, it can take a lot of self-control and smart money moves to make this strategy work. Here’s where to get started.

Master your credit score knowledge

What's in a number? When it comes to your credit score, it's a lot. Understanding credit scores can help you know how to build it up using a credit card. 

Several components go into building your score and these factors can also make it take a nosedive if you're not careful.

When you hear people talking about their credit scores, they're sometimes talking about their FICO scores. FICO breaks down your credit into five main categories, each accounting for a different percentage of your score. The numbers to calculate your score come from the data on your credit report.

Here are the five main areas:

  • Payment history: 35%

  • Amounts owed: 30%

  • Length of your credit history: 15%

  • Credit mix: 10%

  • New credit: 10%

It's obvious where the emphasis lies when it comes to calculating your credit score—paying on time and keeping balances low. 

Know your numbers

Before you decide on the best credit cards for building credit, you want a baseline. Where are you starting?

Is your credit score at rock bottom in the 300s? You have plenty of room for growth. 

Is your credit score non-existent due to not having any credit accounts? Now can be the perfect time to start developing it. 

Your credit score is a three-digit number somewhere between 300 and 850. When you're on the links perfecting your golf swing, you want your score as low as possible. But when it comes to your credit score, it's a race to the top with higher numbers being ideal.

This chart gives you an idea of where your credit score falls based on what FICO says:

  • Exceptional: 800 and higher

  • Very good: 740 to 799

  • Good: 670 to 739

  • Fair: 580 to 669

  • Poor: under 580

Why does your credit score matter?

If you're looking for the best way to use a credit card to build credit, you probably already have some idea of just how important this three-digit number is. Maybe you couldn't get approved for a car loan or you had to pay a higher interest rate. 

Your credit score can impact:

  • Approvals for loans, lines of credit, and credit cards

  • Credit limits

  • Interest rates

  • Better loan terms

The items on your credit report could even impact your career prospects, housing costs, and insurance rates.

Some employers run credit reports when hiring. Landlords can pull your credit report to decide if you can rent from them. And many insurance companies use your credit as one factor in determining your insurance rates.

Have a budget in place

Before you apply for and use a credit card to build your credit, it's important to start getting your finances in order. It’s important to be able to pay off the balance to get the results you want.

Look at your spending habits by pulling up your bank statements and seeing where your money goes. This can help you spot places you can slash spending without too much sacrifice. 

Then, decide how you want to allocate your money. Be realistic when dividing your income between your regular expenses. Set aside money to use for paying off your credit cards.

It can also be helpful to have an emergency fund in place. If you don't have any backup funds available, you might be more tempted to charge emergency expenses on your credit card. That can drive up your balance and make it difficult to pay off over time, which could ultimately lower your credit score. 

Keep things secure

We're not talking about your credit card number, but of course, you should keep that private too. This type of security refers to the type of credit card you get.

Here’s how a secured credit card works—you pay a deposit, which is usually the same as your credit card limit. The money acts as collateral for the card.

You can charge and make payments as normal on the card. This gives you a chance to establish a history of responsible credit use and on-time payments. 

When choosing a secured card, make sure the issuer reports your account to the credit bureaus or it won't help build your credit. 

Piggyback off someone else's good credit

Before you assume we're suggesting something illegal, identity theft isn't a way to boost your credit score. If you want to get help from someone else's healthy financial habits, you'll need their consent.

What we're talking about is becoming an authorized user on someone else's credit card. This can help if your credit score is nonexistent or so low that you can't qualify for a credit card with good terms. Hey, we all have to start somewhere.

If you have a relative who can help you out on your journey toward better credit, they might be willing to add you to their card. What does that mean? You get your own card that's attached to the primary cardholder's account and their credit line without the need for a credit check.

Use caution before considering this option. You could burn bridges if you run up the person's credit card balance or fail to make payments as promised. 

There's also the matter of reporting. Not all companies report to an authorized borrower's credit report, so this strategy may not work for everyone.

If you try this method, make sure the info will be added to your credit report. Come to an agreement on how you'll use the card and pay back your charges. Then, stick with those terms. You don't want to ruin a relationship over your credit score. 

Start small

Applying for every credit card under the sun isn't the best move since new accounts factor into your credit score. Applying for new cards also means hard credit inquiries, which can lower your score briefly.

Plus, too many newer accounts can dilute your credit history, and the average length of your history is a factor in your score. If you open a bunch of new accounts, it could lower your average. 

Multiple accounts also give you lots of tempting available balances to use. If you start charging on all cards, you could end up with out-of-control debt that you can't pay back. 

Limit how many credit cards you use to build your credit. Use them minimally and pay them back regularly. This helps you establish healthy credit habits and a good score. 

Use your credit card, but not too much

Making charges to your credit card shows you can use it responsibly. But charging too much can hurt you. Keeping your credit utilization low can help you increase your credit score.

This falls under the "amounts owed" category, which accounts for 30% of your score. Charging your credit cards right up to their limit could signal financial strain. Lenders might wonder if you'll be able to pay back the balances. 

A simple strategy is to charge your monthly expenses to your credit card. Then, pay off the balance before any interest accrues. This gives you a pristine record of paying on time while keeping your balance low. 

But, make sure you save your paychecks to cover the credit card bill by the monthly due date. If you go wild with spending from your bank account, you might have to carry over your credit card balance to the next month. That means you'll also pay interest, which can make those routine expenses a lot more costly.

If you're worried about doing this, start by just paying one or two of your regular bills with your credit card. This limits the amount you're charging so you don't go overboard. Pay off the charges quickly before you can spend that money on something else. 

Don't miss payments

Your payment history is the single-largest category in the FICO score breakdown. You don't want to ignore this tip for how to use a credit card to build credit. 

Whether you pay off the full balance or just make the minimum payment, always pay your credit card bill on or before the due date. Most creditors let you set up automatic payments for either the minimum amount due or an amount you choose. This is the best way to make sure you never miss a payment.

What happens if you're late? You'll likely get hit with a late fee immediately. Plus, the credit bureaus will find out about your late payment quickly, which could decrease your score significantly. 

Your creditors might not report the late payment if you get caught up quickly. As soon as you notice you're late, call your creditor and make the payment. You probably won't be able to sweet talk your way out of the fee, but you might avoid a drop in your credit score if the company doesn't report it. 

Hold on to the past

Forgiving and forgetting can be a healthy approach to relationships, but you shouldn't let go of the past when it comes to your credit. In other words, don't close old credit accounts when you pay them off or if you think you won't use them again.

FICO counts the length of your credit history as 15% of your credit score. It might not be the largest category, but it's still an influential part of your credit. 

Lenders want to see a long history of on-time payments and responsible credit use. Anyone can behave for a little while — it takes more effort to keep your credit strong over the long haul. 

Keep checking in

Your credit score goes up and down frequently. Checking it regularly helps you track your progress. This can help you figure out what's helping and what could be lowering your score.

Keep in mind that credit events aren't reported immediately. Creditors report at different times, and some may take longer than others to share your info with the credit bureaus. 

Routine credit checks also help you spot inaccuracies that could lower your score. These errors could include accounts that aren't yours, duplicate accounts, inaccurate balances, or identity theft. The three major credit bureaus let you report mistakes online, and you can track the progress to ensure the issue gets fixed.

Have patience

While a credit card can help boost your score, keep in mind that it won't happen overnight. Continue using your card consistently and conservatively to build your credit slowly.

Watching your credit gradually climb can be a motivator, but don't be discouraged if you see an occasional drop. Small drops in your score can occur for various reasons. Your credit score should recover if you stick to your plan of smart credit card use. 

Start building your credit

Building your credit with a credit card doesn't have to be scary. The Varo Believe Card can help improve your score after only a couple of on-time payments.1 Plus, you won't have to worry about interest or hidden fees. There's no credit check, and you set your own credit limit with no minimum security deposit. 

Start taking control of your credit score with these tips for using a credit card to build credit.

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