How to Build Credit with a Credit Card

How to Build Credit with a Credit Card

Building good credit is the key to opening many financial opportunities – like buying a home, renting an apartment, and even getting a job. When used properly, credit cards can be a smart way to build good credit and improve your credit score. We’ve put together some tips on how to use a credit card to your advantage when building credit.

How It Works

First, you’ll need to understand how credit cards impact your overall credit. Typically, the credit card issuer reports your activity and usage to the national credit bureaus – Experian, TransUnion, and Equifax. These bureaus use this information to create your credit reports, which act as transcripts of your financial history and include data such as payment history, credit utilization, new inquiries, and more. Your credit score is a three-digit number derived from the information in your credit report and indicates to lenders how well you manage your finances.

Live Within Your Means

When using your credit card to build credit, be sure you aren’t overspending or keeping a large balance owed on your card. Create a budget to make sure you can afford whatever purchases you make and can pay your balance in full each month. By doing so, your payment history will look great – which boosts your credit score – and you won’t incur any interest charges or fees. Your payment history makes up around 30% of your credit score and negative items can stay on your credit for up to seven years.

Choose the Right Card for You

You may receive credit card offers electronically or in the mail, but not all credit cards are created equal. Typically, the best cards require excellent credit. If you’re just starting out or rebuilding your credit after a few mistakes, you may not be eligible for a card with all the perks, but you should compare all your options. What you’ll want to consider are any fees you may incur and what types of reward programs may benefit you. For example, if you choose a card with cash back rewards that requires paying an annual fee of $100, will you earn enough cash rewards to offset the annual fee? If not, you may be better off finding a card with no fee instead.

If you’re struggling to get approved for a credit card, considering seeking out a secured credit card option. A secured credit card is one that requires you to put the same amount of money as the credit limit in a separate account. This account “secures” the card. If you don’t make the payments, the money will get pulled from this account. This way, a lender doesn’t have to be worried about whether or not you’re going to make your payments.

If you’re responsible with a secured credit card, it can help build your credit by showing potential lenders that you can pay your bill each month.

Keep Your Cards Open

Having a long credit history may help increase your overall credit score, so don’t close out any unused credit cards or other lines of credit. It may seem counter-intuitive but having more available credit can be helpful. It shows lenders that you aren’t a habitual over-spender and that you’ve made responsible financial decisions over a longer period of time. It may be tempting to open a new credit card every time you receive a good offer, but too many inquiries can have a negative impact on your credit. Every time you open a new card, you decrease the age of your credit, which makes up 15% of your overall score.

Monitor Your Credit

As you build credit, you’ll want to continuously monitor your credit, too. You’re eligible for a free credit report once a year from each of the three credit reporting agencies. When pulling your own credit, be sure to use www.AnnualCreditReport.com, as it’s the only website authorized by the federal government to provide your credit report for free.

While your credit report is free, no one is obligated to provide you with your credit score for free. If you’re a PSECU member, you can receive your score for free once a month with our free credit score service*.

Credit cards can be a useful tool in building credit when used responsibly. For more financial tips and tools, visit our WalletWorks page.

 

*PSECU is not a credit reporting agency. Members must have PSECU checking or a PSECU loan to be eligible for this service. Joint owners are not eligible.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Some products not offered by PSECU. PSECU does not endorse any third parties, including, but not limited to, referenced individuals, companies, organizations, products, blogs, or websites. PSECU does not warrant any advice provided by third parties. PSECU does not guarantee the accuracy or completeness of the information provided by third parties. PSECU recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.