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Using a Credit Card to Build Your Credit

Use your card responsibly by paying on time and in full — and sticking to a budget.
Credit Cards, Credit Score
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Your credit score is determined by a variety of factors, so it can be difficult to know where to start if you’re trying to build your credit or remedy credit problems. One of the best ways to build your credit score is to use a credit card regularly and responsibly.

Follow these guidelines to build your score.

Pay on time and in full

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.

Your payment history is 35% of your FICO score, so paying on time is essential to building good credit.

If you’re not already making payments on a loan, putting your regular expenses on a credit card helps you establish credit without going into debt. Simply 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 score, so this is one of the best things you can do to build your credit score.

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.

Spend only what you know you’ll be able to pay in full.

It’s important 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.

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Keep your balance low

The second most important factor in your FICO score is the amount 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 on your credit cards as a percentage of your available credit. The higher your credit utilization, the more likely it is that you’re overextended and may miss payments. Thus, using your credit card and keeping your credit utilization low can provide a significant boost to your credit.

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 a high credit utilization. The amount on your monthly statement is generally the amount that card issuers report to the credit bureaus. To make sure your credit utilization stays low, consider making payments throughout the month rather than waiting for your statement to come.

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. 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 the account open. Every time you open a new credit account, it lowers the average age of your accounts, which can hurt your credit score. Your length of history makes up 15% of your FICO score.

Rather than shuffle from one card to another, find a card that meets your needs and keep the account open.

Nerd note: Every time you apply for a new credit card, the issuer will check your credit. These kinds of checks can knock some points off your score, too — another reason to avoid constantly applying for cards.

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.

Also, be sure to thoroughly investigate all of your options before applying. Multiple credit card applications in a short period of time can hurt your credit score, even if you’re denied.

The bottom line

Using credit cards unwisely can hurt your credit, but that doesn’t make credit cards bad. In fact, responsible credit card use can help you build your credit score without you having to take on extra debt.

However, if 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.

Ben Luthi is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @benluthi.

This post updated Feb. 16, 2016. It originally published June 18, 2013.

Image via iStock.