Using a credit card effectively is one of the best ways to build your credit history and achieve a higher credit score. Done right, using your credit card isn't just a way to conveniently pay for things you need, it's also an avenue to increasing your creditworthiness and unlocking a range of other affordable borrowing options in the future.
The key is to always manage your credit card responsibly and strategically, with good credit habits in mind. This mostly comes down to keeping your balance low and always making on-time payments. Here are six key steps to building credit with a credit card.
1. Always Make Payments on Time
Making all your payments on time is the single best way to build good credit with a credit card. Your payment history is the biggest factor in your credit score, making up 35% of your FICO® Score☉ , the score used by 90% of top lenders. In addition to playing a huge part in developing a high score, a history of on-time payments is an indication to lenders that you're a responsible borrower. Late payments, on the other hand, stay on your credit report for seven years and hurt your score.
To start building credit with your credit card, make sure that you always pay at least the minimum by the due date each month. Ideally, though, you'll pay off your entire credit card balance each month to avoid interest charges. Set up automatic payments for the minimum amount due, the statement balance or other amount you select so you never miss a payment.
2. Use a Budget With Your Credit Card
Getting your first credit card is a major win for your credit, because it gives you the opportunity to start building a positive credit history and higher score. But it's also a big responsibility. Having access to a line of credit can feel like having free money, and the temptation to use it to foot the bill for things you can't afford now could be high. But this can be an entry point into debt.
Fortunately, you're in control when it comes to how you use your credit card. Try these tips:
- Use your credit card like a debit card. Set up a budget and determine how much you can afford to spend in different categories, such as groceries, dining and retail each month. Then use your credit card alongside that budget, ensuring you're only spending money you can afford to spend.
- Use your credit card for one or two bills a month. Rather than using it for variable spending, consider setting up a bill or two so that they're automatically charged to your credit card. Just be sure to set up autopay for your credit card, too, to avoid forgetting to pay the balance.
- Pay your balance in full each month. While it's true that paying just the minimum payment on time will keep your payment history in good shape, it's even better to pay off your balance in full each month. This helps you avoid falling into debt, avoid interest charges and keep your credit utilization ratio low (more on this below).
3. Keep Your Credit Utilization Ratio as Low as Possible
Your credit utilization ratio is the amount of credit you use compared with the amount of credit you have access to. To calculate your credit utilization on your credit card, divide your balance by the card's limit and multiply by 100 to get a percentage. For example, if you have a $2,000 balance and your credit limit is $10,000, your utilization ratio is 20%. Credit scoring models calculate utilization rates for each individual credit card as well as across all your credit cards if and when you get more.
The lower you keep your credit ratio, the better. Always be sure to keep your ratio under 30%—and for the very best scores, under 10%. There are two ways to lower your credit utilization: Pay down your credit card balance or increase the amount of credit you have available to you.
Increasing your available credit can be a good thing, but the best way to use your credit card is to pay your balance off each month. That way, you'll keep your utilization very low, build up your payment history and avoid paying any money in interest.
4. Keep Your Credit Accounts Open
If you're not getting much use out of one of your credit cards, you may be tempted to close the account. But it's best to keep your credit accounts open if possible.
Having a long history of responsible credit management helps you achieve an excellent score, and part of your credit history is the average age of your credit accounts. If you close your oldest credit card, the average age of your accounts decreases.
To improve your credit, avoid closing old accounts, even if you've moved on to a new card. Of course, you should always check your card's terms to ensure you're making the best decision for your finances and credit. If you're paying an annual fee on a credit card, that may be a good reason to close it. It's sometimes possible to "downgrade" a credit card with an annual fee to a different card through the same lender. That can help you keep a credit card open to avoid a hit to your credit without having to pay an unnecessary fee.
5. Don't Open Too Many Accounts at Once
To avoid adding multiple inquiries to your credit report, which can make you look risky to lenders, and to help the average age of your credit accounts, don't open multiple credit cards in a short span of time.
Your credit scores can take a small hit every time there is a hard inquiry on your credit reports, which occurs whenever you apply for new credit. So once you have a credit card, it's wise to stick with that card for a while. When you're ready for an upgrade or card that offers different features, be thoughtful about which card you apply for and aim to space out new credit card applications by at least six months per card.
6. Check Your Credit Regularly
Part of responsible credit management is keeping an eye on your credit report and score to ensure that everything is accurate and that your good credit behaviors are moving your score in the right direction.
You can check your credit score for free to see where you stand. In addition, you can automate the habit by signing up for free credit monitoring through Experian. You'll get an alert when new information appears on your report. That can help you keep tabs on your progress. In addition, any unrecognized activity that appears on your credit report can be a sign of identity theft, so catching it early and disputing it is a smart way to up your defenses.
Play the Long Game With Your Credit Card
Getting your first credit card and using it well opens the door to more borrowing opportunities over time, such as by helping you get your credit ready for a mortgage. But keep in mind that building credit takes time. Use your credit card consistently and pay off your balance in full each month when possible. Also, avoid opening up many accounts or using credit cards to finance large purchases that you can't repay within the grace period.
When you are ready for a new card, look for one that you're likely to qualify for to avoid unnecessary inquiries, and pick a card that aligns with your goals, such as a travel rewards card or a card with a 0% introductory APR period. When you're weighing your options, consider Experian's free comparison tool that links you to credit cards aligned with your preferences and credit profile.