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How to Build Credit with a Credit Card
22 Jun 2018

How to Build Credit with a Credit Card

Having trouble establishing a good credit score? As you know, your credit score is one of the key factors lenders take into account when you are trying to get a mortgage for your first home, buy that new car you’ve been looking at, or even just get a smaller loan to pay off some bills.

While you may know how important your credit score is, do you know the best place to start? If you don’t have a good credit score, or maybe you don’t even have a credit history, you may be thinking of applying for a no credit check loan. These can be good to improve your credit score, but carry high interest rates.

Instead of getting denied for trying to get high interest rate loans, why not start with something easier? This article will show you how to build credit with a credit card.

How to Build Credit With a Credit Card?

One easy first step in how to build your credit with a credit card is to make your regular monthly purchases on the card. The key here is that you have to pay off the card’s balance in full every month.

By paying off your card’s balance in full, you won’t be charged interest. You’ll also start raising your credit card over time. 35% of your FICO score is based on your payment history, so having a good history with credit cards will help!

This means you never put anything on the card that you don’t already have cash for in the bank. If you don’t have the money now, don’t buy it. You’re using a credit card to establish credit, not to make purchases that you can’t yet afford.

To help you to keep from overspending, you should have a budget. This is a good idea whether you’re using credit cards or not, but you have to have one if you’re using them.

By following your budget, you will know how much money you have in the bank and how much you can afford to spend without owing the credit card company at the end of the month.

How Much Should You Carry Over on Your Cards Every Month?

If you are unable to make your card payments in full every month, try to keep your balance as low as possible.

Credit scores look at how much credit you’re allowed to use and how much you actually use. This is called your credit utilization ratio. If you have a high credit limit, but only keep a little on your card from month to month, you have a low credit utilization ratio.

This will raise your credit score. 30% of your FICO score is based on your credit utilization ratio. You want to owe 30% of your credit limit or less every month.

This also means you’re paying less in interest too!

If you’re paying your card off every month like you should, you might still have a high credit utilization ratio. This is because credit card companies often report your monthly balance and sometimes not the amount you carry over from month to month.

Maxing out your credit limit every month even if you’re paying it off by the due date can hurt your credit score. You might make payments twice a month to lower your credit utilization ratio.

Should You Open and Close Accounts?

It can be tempting to open a new card to get a discount at retail stores. While you may save a bit of money with your purchase, this can hurt your credit score.

Opening and closing accounts counts as a hit on your credit, and every hit lowers your credit score. It’s best just to open a few accounts that you plan to use.

With that said, don’t start closing all your old, unused accounts now. If they’re already open, you can leave them alone. The longer you’ve had an account open, the better your credit history is with that company, even if you haven’t used it.

Remember we talked about credit utilization? All your open accounts are included, so by having a few different ones, you’ve increased your credit utilization ratio.

The length of your credit history is about 15% of your FICO score too.

Your credit will increase faster if you are using your credit cards, but if you already have accounts open, don’t close them.

If you don’t have any credit card accounts, it’s best to choose a couple that you will use. Make sure they offer the cash back or rewards programs that you will use before you open the accounts. You don’t want to open and close many accounts before you find one you like.

Which Cards Should You Apply For?

Now let’s continue talking about opening new credit card accounts. If you have no credit history, you might have a few more options. Check out what deals and rewards are available.

Remember, do your research before you open an account. There’s nothing worse than opening an account, then finding one that’s better the next day.

If you have bad credit, don’t panic. There are cards designed for people with bad or fair credit. While the perks won’t be as great as other cards, these will help you to build your credit score.

It can be dangerous for people with bad credit to apply for cards too. Remember we talked about hits on your credit history? Every time a credit card application runs your credit report, you get a hit.

This means you should never apply for a credit card that you think won’t be approved. Also, if you apply for a lot of cards in a row, it can hurt your credit score even more. This can show that a person is likely in financial trouble.

So, if you don’t have good credit history, focus on opening a credit card that you know will approve you.

If you’re not sure what your credit history is, you need to check it before you do anything else. This will help you not to apply for cards that won’t approve you anyway.

Another idea for building up your credit score when you have bad credit is to take out a bad credit loan. That’s one way to increase your credit if you’re having trouble getting approved for credit cards.

Next Steps

Now that you know how to build credit with a credit card, it’s time to take the first step. It’s time to find the perfect credit card for you. We might be able to help you find the best credit card for your needs.