How to Build Credit with a Credit Card
Securing a credit card and utilizing it each month can be a tremendously effective strategy to build a robust credit score. While other borrowing and repayment options are also part and parcel of a diverse financial portfolio, using a credit card to build credit may just get you the most bang for your buck.
That’s because swiping plastic involves new purchases and regular repayments. The overall view of credit agencies about people who make timely payments is that you are a trustworthy borrower and financial planner. Building credit with a credit card positions you for more lucrative loan products.
With a top-flight credit history built on your credit card foundation, car loans, vacation borrowing, and even a home mortgage could be within your grasp. Of course, moving up the credit score ladder involves smartly leveraging credit card usage to maximize its value. These are questions people who are using a credit card to build credit commonly ask.
How Long Does it Take to Build Credit with a Credit Card?
It may come as something of a surprise, but you can use a credit card to build credit rather quickly. Agencies report that improved scores can be garnered within three to six months of routine activity. The swift positive change for people who pay their monthly bill on time is largely due to the fact that most credit card companies report activity directly to agencies. Mortgage originators and big lending institutions can be considerably slower in their reporting. By charging items and paying off your monthly balances consistently, a credit card can fast track your score.
How Much Should I Spend to Build Credit with a Credit Card?
It might seem to make sense that using a lot of your credit bandwidth will ramp up your credit score. Some people try to charge as much as possible each month and then pay it all off. Others might max-out the card, pay it off and then lock it away with a zero balance. Believe it or not, more is not necessarily more when it comes to improving your credit score.
Although these are not the worst strategies, the industry does have a sweet spot when it comes to building credit with a credit card. The prevailing wisdom is that an individual should utilize between 1 and 30 percent of their credit on a monthly basis to get the best result.
Do I Need to Carry a Credit Card Balance to Build my Credit Score?
If that TV show “MythBusters” ran a financial segment, carrying a credit card balance to maximize your score would top the list of myths. There is no reason whatsoever that you need to carry a monthly balance.
The fact is that carrying a balance unnecessarily subjects you to paying interest. Credit scores and histories are driven by the process of borrowing or using a line of credit, and then repayment. Owing money and forking over your hard-earned money in interest payments are not part of the equation.
On the other hand, carrying a high balance can negatively impact your credit score. As mentioned before, using a credit card to build credit works best when you remain in the 1- to 30-percent range. Carrying balances tend to lead people to exceed the 30-percent threshold, and that can actually cause your score to tick down a few points.
Leveraging a credit card to build credit can be an effective and efficient way to maximize your borrowing potential. However, it’s essential to use that card wisely and consistently use strategies that improve your standing.
Consumer Tricks to Building Credit with a Credit Card
There are no magic solutions to improving your credit. But by employing the following financial strategies, you can build the pristine credit history you desire.
- Apply for a Secured or Starter Card: If you have dinged-up credit, secured products can be an excellent way to get your foot in the credit-score-building door. There are also numerous low-limit and starter cards to help your cause.
- Select Your Card Wisely: When applying for a new credit card, consider your needs, the interest rate, potential fees, and promotional offerings. Make sure they are well suited for you to leverage the credit card to build credit in a positive fashion.
- Automatic Payments: To avoid hurting your credit score, set up electronic payments beyond the minimum, or just pay the full amount. If you are auto-paying the minimum, circle back, and pay down as much as possible when your next paycheck arrives.
- Never Max-Out the Card: The 1- to 30-percent rule is considered an excellent strategy for building credit with a credit card. Hitting a card’s limit may actually set you back a few points.
- Consistent Credit Usage: Remember that scores uptick when you utilize credit and promptly pay off the balance. Consistency demonstrates that you are reliable and can help you achieve the top-flight credit score you deserve.