How Can Credit Cards Build Credit?

How Can Credit Cards Build Credit

It’s a bit of paradox that credit cards can be both your worst enemy and your best friend when it comes to your credit situation. Out-of-control credit card debt was at the root of the ballooning number of bankruptcies over the last several years. Yet, for people seeking to build, or re-build their credit, they offer the best opportunity to do so when used wisely. But because their use or abuse can impact your credit standing in a number of ways, it’s important to understand specifically how credit cards can build your credit.

Build a payment history

The most important measure of your credit is your payment history, the cumulative record of your individual payments to your creditors. So, you need to be able to demonstrate on time payments. The best way to use a Credit Card to Build a payment history is to use it to pay your monthly, budgeted expenses, such as groceries and gas, and then pay the balance in full each month. If you do have to carry a balance, it is vital to pay on time and pay more than just the minimum payment.

Show responsible use of credit

You are also measured based on how well you manage your credit. If you run up your balances to the credit limit on your cards, the credit bureaus will see that as to heavy a reliance on credit. Keep your balances below 30 percent of your credit limit for optimum scoring on your credit report. It’s also a good idea to keep your credit limits low initially to avoid the temptation to spend outside your budget. You can let the credit card company know the credit limit you want, and you can turn down offers to increase your limit.

Be discerning when adding new credit

If you add too many new lines of credit too quickly, you will hurt your score. Also, the type of credit you add can adversely affect your credit score. Avoid adding credit from retail stores or consumer loans. If you feel compelled to respond to a credit card offer, make sure it’s a good one, offering better terms than on your existing cards, otherwise, it’s not worth the temporary hit to your credit score. Also, if you apply for credit too often, it will hurt your credit score.

Which types of credit cards can help build credit?

With these key principles in mind, you can start building your credit with a few different types of credit cards. If you can’t qualify for an unsecured credit card, you can usually obtain a secured credit card. These are no different than an unsecured card in their use, but your line of credit is established by a savings deposit you provide in the range of $250 to $1,000. You will have access to all or a part of your deposit as a credit line. Your payments are reported to the credit bureau to get your payment history going. After six months to a year, your credit history may be sufficient to qualify for an unsecured card. Be sure and remember the three essential principles discussed above for building your credit quickly.

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