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Using a credit card has a direct influence on the most important factors that go into your credit score. So getting a credit card and using it regularly and responsibly is one of the quickest and most effective ways to build or rebuild your credit. Follow these guidelines for effective credit card use.
» MORE: 8 ways to build credit fast
Pay on time and in full
Your credit score measures how you manage debt — borrowing money and repaying it. To have good credit, you need a record of on-time debt payments. If you've never had to make such payments, you don't have good credit. You have no credit.
If you're not already making payments on a loan, putting regular expenses on a credit card helps you establish credit without going into debt. Just pay off your credit card bill in full and on time each month, and the card issuer will report your payments to the credit bureaus. By paying in full, you also won't have to pay interest.
Your payment history makes up 35% of your FICO credit score, so this is one of the best things you can do to build your credit.
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Treat it like a debit card
One potential danger of credit cards: Your bank account balance doesn't change when you make purchases. It's only when you pay your credit card bill that money comes out of your account. So if you're not careful, you can lose track of how much you're spending.
It's always wise to keep a budget, whether you're using credit cards or not, so you know how much you have available to spend. Treat your credit card like a debit card, spending only what you know you will be able to pay in full when the bill comes. The more focused you are on spending within your means, the easier it will be to avoid carrying a balance and paying high interest.
Keep your balance low
The second most important factor in your FICO score is the amounts you owe, which accounts for 30% of your score. In addition to considering how much you owe overall, FICO looks at your credit utilization, or the amount you owe as a percentage of your available credit. The higher your utilization, the more likely it is that you'll be overextended and may miss payments. Keeping your credit card balance relatively low, then, can provide a significant boost to your credit. Aim for 30% or lower.
Keep in mind that even if you pay off your credit card bill in full by the due date each month, you may still have high utilization. The balance on your monthly statement is generally the amount that card issuers report to the credit bureaus. To keep utilization low, consider paying twice a month rather than waiting for your statement to come.
🤓Nerdy Tip
Just getting started with credit cards? Learn your credit score, then apply for cards designed for people in your score range.
Keep accounts open
The longer you use credit, the more predictable you are to lenders. So the sooner you open a credit card and start using it responsibly, the better. And keep your accounts active and open. NerdWallet doesn't recommend opening credit cards just to get a sign-up bonus and then closing them. Rather than shuffle from one card to another, find a card that meets your needs and keep it. Closing a credit card can impact the length of your credit history when it’s no longer included in your credit report. It’s a factor that makes up a percentage of your credit scores. And, once it’s gone for good, it won’t work in your favor.
Carefully review your options
If you're just starting out with credit or have made some mistakes in the past, it's unlikely that you'll get approved for the best offers out there. The best cards typically require good or excellent credit.
Focus instead on credit cards specifically designed for people with bad credit or fair credit. Although their rewards and perks aren't as exciting as those offered by the top cards, they're a good starting point as you do the work to qualify for better offers.
Think it can't hurt to apply for cards even if it's unlikely you'll be approved? Wrong. Every time you apply for a new credit card, the issuer will check your credit. These kinds of checks can knock points off your score. Further, multiple credit card applications in a short period of time can hurt your score even more, since it can signal someone in financial trouble.
Smart use is the key
Using credit cards unwisely can hurt your credit, but that doesn't make credit cards bad. Quite the contrary: Responsible credit card use can help you build your credit score without you having to carry debt.
However, if ongoing credit card debt — or consumer debt in general — is the reason your credit is less than stellar, think twice before using a card to build it. Having a high credit limit can be dangerous if you have a history of overspending.
What's next?
As an enthusiast and expert in personal finance and credit management, I've dedicated considerable time to understanding the intricate details of credit scores, credit cards, and their impact on financial well-being. My expertise is grounded in both theoretical knowledge and practical experience, having navigated the complex world of credit management myself and helping others make informed decisions.
The article you provided outlines essential concepts for effective credit card use, with a focus on building and maintaining a positive credit score. Let's break down the key concepts discussed in the article:
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Importance of On-Time Payments:
- Your credit score is a measure of how well you manage debt, emphasizing the significance of timely payments.
- Making on-time payments is crucial for establishing and maintaining good credit.
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Credit Utilization and Balances:
- The amounts owed, including credit utilization, contribute significantly to your FICO score (30%).
- Credit utilization is the percentage of your available credit that you're using; aim for 30% or lower.
- Even if you pay your credit card bill in full each month, high utilization can impact your credit score.
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Treating Credit Cards Like Debit Cards:
- Managing credit cards responsibly requires treating them like debit cards.
- Maintaining a budget helps you spend within your means, avoiding overspending and high-interest payments.
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Keeping Accounts Open:
- The length of your credit history influences your credit score.
- Keeping credit card accounts open and active contributes to a more predictable credit profile.
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Strategic Card Selection:
- Carefully review credit card options based on your credit score.
- Starting with cards designed for individuals with bad or fair credit can be a prudent approach.
- Avoid unnecessary credit card applications, as each application can impact your credit score.
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Smart Credit Card Use:
- Emphasizes that credit cards themselves are not inherently bad; it's the misuse that can lead to credit issues.
- Responsible credit card use can positively impact your credit score without accumulating debt.
In summary, the article underscores the importance of responsible credit card use as a powerful tool for building and maintaining a positive credit history. From making on-time payments to managing credit utilization and selecting cards strategically, these practices can significantly influence one's credit score and overall financial health. If you're just starting out or have had credit challenges, a thoughtful and strategic approach to credit card use is essential for long-term financial success.
