If used responsibly, credit cards can be an effective way to build credit. You can meet your credit goals by using credit cards you already have or by applying for a new one. Either way, you’ll need to make your payments on time and keep the balances low for this strategy to work. But if you’d prefer not to use a credit card to build credit, there’s another viable option that you’ll discover in this guide.
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How Fast Can You Build Credit with a Credit Card?
It’ll take at least six months to establish credit if you have no credit history. But you can cut this timeframe short by becoming an authorized user on someone else’s credit card. If the credit card issuer reports account history before the date you’re added to the card as an authorized user, you could get a credit score right away. Otherwise, you’ll have to wait for six months.
How to Use a Credit Card to Build Credit
Pay On Time
Payment history is the most significant factor in your FICO score. If you miss a payment on your credit card and your account is past due for 30 days or more, it can be reported as delinquent to the major credit bureaus and have a negative effect on your credit score.
Unfortunately, information on your late payments remains on your credit report for up to seven years. So, you want to make timely payments each month to prevent this from happening. Also, consider setting up autopay on your credit card accounts to avoid missing payments and remain in good standing.
Keep Balances Low or at Zero
Your credit utilization rate, also known as the amount of available credit you use on your credit cards, is the second most important factor in your credit score. To illustrate, if you have five credit cards with $500 credit limits and spend $200 on each card, your credit utilization is 40 percent.
Ideally, you want to keep this figure at or below 30 percent – 10 percent or lower is even better if you’re seeking excellent credit.
Consider a Secured Credit Card
A secured card is ideal for individuals who have bad credit, little or no credit history or are trying to rebuild their credit and get a better credit score. They operate like traditional credit cards but require a security deposit to open an account and use the card.
You’ll generally get approved for a credit limit equivalent to the mandatory refundable security deposit, and you’re free to spend up to this amount. You’ll make at least the minimum monthly payment each month to keep the account in good standing. But you should probably pay more than this amount to improve your credit score. It’s equally vital that you get a secured credit card with minimal fees that report to the three credit bureaus – Experian, Equifax and TransUnion – each month.
Also, be mindful that some credit card issuers will upgrade you to an unsecured credit card and refund your security deposit. However, you’ll need to demonstrate that you can responsibly manage the card for an extended period for this to happen.
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Don’t Apply for Multiple Credit Cards
Each time you apply for a credit card, a hard inquiry is generated and could drop your score by a few points. It may not seem like a big deal, but several inquiries in a short period could mean bad news for your credit score. Furthermore, potential lenders and creditors could see you as risky and deny credit applications even as your credit score starts to increase.
Consider a Credit Builder Loan as an Alternative to Build Credit
Credit cards aren’t the only way to build credit. A credit builder loan can also be effective if the lender reports account activity to the credit reporting agencies each month.
Self is a good option as it offers the best of both worlds – you can save money while building credit. There is no security deposit requirement, and there are three credit builder accounts to choose from:
- Small Builder: pay $25 per month and receive $520 at the end of 24 months
- Medium Builder: pay $35 per month and receive $724 at the end of 24 months
- Large Builder: pay $48 per month and receive $539 at the end of 12 months
If you choose to move forward with a credit builder loan from Self, here’s how it works:
- Step 1: Apply for a Credit Builder Account without impacting your credit score as there’s no hard credit check. If approved, you’ll pay the $9 administrative fee, and Self will place the loan proceeds in a certificate of deposit.
- Step 2: Start making the agreed-upon monthly payment on your Credit Builder Account.
- Step 3: Watch your credit history and savings balance grow each time you make a payment.
- Step 4: Receive the money you’ve saved up, minus interest and fees, once you’ve paid your Credit Builder loan in full.
The Self App is available on the App Store and Google Play, wherein you can enter your email address and get started in minutes.
The Bottom Line: Can You Build Credit with a Credit Card?
A credit card is just one way to build good credit, but a credit builder loan can also work for you. Ultimately, you want to evaluate both options to determine the most ideal for your financial situation.