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Credit cards can be used to earn rewards, take advantage of special financing offers and simplify expenses — and they’re also a great way to build credit. Taking the time to build credit with your credit card can help you down the line when you want to take out a loan or apply for a mortgage, since those products tend to reserve the best terms for people with good or excellent credit.
Just as easily, however, credit cards can drag your credit down if you don’t use them wisely.
In this post, we’ll offer credit building tips that can help you improve credit score over time.
In this article
Pay on time and in full each month
Payment history is the most important factor making up your credit score at 35% and directly relates to whether you pay your bills on time and in full or not. It’s a good idea to maintain a good payment history because it can help your credit score and let you avoid the late payment fees, penalty APRs and interest charges that typically come with carrying a balance month to month.
Tip: Most credit cards have autopay, which can help you avoid missed payments. If autopay isn’t for you, set up alerts on your calendar or with your issuer to remind you of your payment due date.
Charge small purchases
You can build credit by simply adding a small recurring charge to your card and paying it off each month. Avoiding high charges on your credit card can help you avoid overspending and allow you to maintain a low utilization rate, which is another important factor of your credit score that’s explained more in the next section.
Tip: Small charges like a Netflix or Spotify subscription are great to add to your credit card.
However, we understand you may need to charge more than a monthly subscription, so a good rule of thumb to follow is don’t spend more than you can afford to pay when your bill is due. And, if you want to take it a step further, don’t spend more than you can afford to pay at the time of purchase.
Maintain a low utilization rate
Utilization rate — or amounts owed — is the second most important factor of your credit score at 30%. It’s defined as the amount of credit you use divided by the total amount of credit you have. So, if you have two credit cards with a $2,000 and $3,000 credit limit, your total amount of credit is $5,000. Then, if you have a combined balance of $1,000 across both cards, your utilization rate is 20% ($1,000/$5,000). We consider a utilization rate below 30% ideal.
Tip: Many issuers let you set up alerts for when your balance hits a certain amount. Take advantage of this feature so you can be notified when you spend more than 30% of your credit limit.
Don’t open too many credit cards in a short period of time
While there’s no exact answer to the question “How many credit cards should I have?” — a survey by Experian found the average person has three credit cards. Depending on your financial situation and how responsible you are with credit, the ideal number of credit cards for you may be more or less than three.
Tip: If you struggle to use one credit card, it may not be a good idea to open more cards since you may risk missing payments or racking up debt due to the increased line of credit provided by multiple credit cards.
Other potential — but temporary — drawbacks of opening too many credit cards is the initial negative effect it has on your average length of credit history. Opening several cards lowers the average length of time you’ve had credit. For example, if you have one credit card that’s 10 years old, but open a new card, your average length of credit history drops to five years. The impact on your credit score will wear off as time goes on. Also, each time you open a new credit card, a hard pull of your credit is performed and that may slightly lower your credit score.
Use a secured card to build credit
A secured card is a great alternative to an unsecured, traditional credit card if you’re looking to build or rebuild credit There are, however, traditional card options that may be a great fit). The main difference with a secured card is that you need to make a minimum security deposit — typically $200 — which becomes your line of credit. Don’t worry about losing your security deposit; it’s refundable if you transition to an unsecured card, or if you pay your balance in full and close your account. And, secured cards may provide an increased chance of approval compared with a traditional credit card since the credit requirements are less stringent for bad or fair credit, or those new to credit. Check out our top picks for secured cards.
Tip: If you want a larger credit limit, you need to deposit more money. However, some cards may increase your credit limit without requiring an additional deposit if you make several consecutive on-time payments. Refer to your cardmember agreement.