How to Build Credit with a Credit Card: 5 Best Tips for Complete Beginners
Having a good credit score is a must. It’s what often determines whether you receive favorable mortgage interest rates, a loan, or credit cards with various benefits. In other words, knowing how to build credit sets you up for a better financial situation in the future.
Since the world of finance is sometimes complex and confusing, it can be tricky to know where you should start. How do you use a credit card to build up credit? Which credit card should you go for? And why do you need a credit card to begin with?
The questions seem endless.
Which is why we’ve compiled a complete guide that will take you through all the basics of building your credit score – even if you have no credit history!
First things first, though. What even is a credit score? Like, really? And why is it such a big deal in the first place?
What Is a Credit Score & Why Is Credit So Important?
A credit score (or credit rating) is a number that demonstrates to potential lenders if you’re reliable enough to borrow money and repay your debt on time. The most popular kind of credit score is a FICO Score that ranges between 300 and 850.
According to Experian, a leading credit reporting agency, 300-579 means poor, 580-669 is fair, 670-739 is good, 740-799 is very good, and 800-850 means excellent.
If you’re planning on applying for a mortgage, a loan, or other services one day, knowing how to build a credit score is an essential skill.
Just think about it – why would you lend money to someone who has shown no proof of reliability? Your credit rating is the evidence that screams at the top of its lungs, “I am responsible! Pick me!”
And the benefits of knowing how to build your credit score don’t end there. When you do get approved for a mortgage, your credit rating can determine which interest rates you’re getting – the better your credit history is, the lower your interest rates are.
Landlords can also ask to check your credit score if you’re looking for a place to rent, and loans – including business loans – are largely dependent on your credit history, too.
How to Build Credit from Scratch: 5 Tips for Beginners
So, you’ve decided to build up your credit. Now comes the ultimate question:
What’s the best advice on how to build credit when you have none?
In order to get a credit card, you need some credit history, right? But how do you accumulate credit history when you don’t even have a credit card?
It’s a vicious circle.
There are multiple solutions, though! From choosing the right credit card to knowing the best ways to boost your credit score, here are our top five tips!
Tip 1: Get Your Foot in the Door with the Right Credit Card
If you just walk into a bank right now and apply for a random credit card, chances are you won’t get it. It’s also not a great way to start your credit journey.
Knowledge is power, and knowing which credit card you should apply for can largely affect your future credit rating. Here are some of the best options for beginners.
Secured Credit Card
Secured credit cards are one of the easiest types of credit cards to apply for, and that’s because you have to pay a security cash deposit to open an account.
Remember how a credit score gives your potential lenders something to rely on? Well, a cash deposit works on a similar basis – since you have no credit history, you’re at least giving your lenders some sort of protection.
If you go off the rails and show yourself to be financially irresponsible, the deposit goes to them. Simple as that.
Deciding between secured vs unsecured credit cards is a different topic altogether - for now, just remember that getting a secured credit card is a great way to start your credit journey.
Student Credit Card
Looking for ways to build credit as a college student? We’ve got you!
Student credit cards are targeted at young people looking to build a credit score. As long as you repay all your debt on time and act responsibly, your student card will help you build your credit rating.
And that’s not all! Student credit cards often offer many great benefits, such as rewards programs – you earn points or cash back in specific purchase categories, like travel or entertainment – no annual fees, and amazing sign-up bonuses.
Store Credit Card
The third option is to apply for a store credit card. They aren’t that difficult to obtain and they factor into your credit score calculations.
If you often shop at the same retailer, getting a store credit card might make your shopping trips more manageable. Regularly repaying your balance in a timely manner will show you in a positive light and improve your credit score.
Become an Authorized User on Someone Else’s Credit Card
Last but not least, you don’t actually need to obtain your own credit card to build a credit score. If you want to learn how to shop responsibly first, you can be added as an authorized user to your parent's or spouse’s account.
Before you do that, though, make sure their credit score has good standing! It will be added to your credit reports, which means you can boost or ruin your credit rating based on someone else’s activities. Getting your own credit card gives you more control.
Extra Tip: If you’re searching for ways to build a credit score for children under 18, making them an authorized user on your account is a great option.
Tip 2: Understand What Affects Your Credit Score
If you know how to build up credit in the best way, you’re already one step ahead. In order to do that, however, you need to know what specifically impacts your credit score. This will determine your financial behavior.
The five factors that affect your credit score the most are:
- Payment history (35% of the FICO score)
- Credit utilization (30% of the FICO score)
- Types of credit (10% of the FICO score)
- Length of credit history (15% of the FICO score)
- New credit (10% of the FICO score)
Let’s unpack what all these mean.
Have you noticed that repaying your debt on time seems to be a big deal throughout this article?
Yeah. That’s because it is.
Payment history – the record of how you’ve been paying back your balance over the course of your credit – accounts for as much as 35 percent of the FICO score. This makes it an extremely important part of building your credit score with a credit card.
Do always pay on time. It makes a difference.
Your credit utilization is how much of the total credit you’re using – in other words, how much debt you’ve accumulated as compared to how much credit is available to you. If your credit is $1000 and you’ve used $100, your credit utilization is 10%.
Try to always keep your credit utilization low – anywhere between 10-30% should do the job.
Extra Tip: If you’re struggling to keep your credit utilization low, counteract this by either obtaining more credit cards and splitting your purchases between them, or by increasing your credit limit.
Types of Credit
As if things weren’t confusing enough, there are actually different types of credit that you can have, and mixing them is an extremely useful way to build your credit score.
These are the three types of credit you need to know about:
- Revolving credit – there are various payments each month (e.g., credit cards)
- Installment credit – there is a fixed payment each month (e.g., student loans, auto loans, mortgages)
- Open credit – the amount due at the end of each month varies (e.g., electricity bills, cell service)
Mixing different types of credit is ideal because it shows potential lenders you’re capable of managing different kinds of debt and repayment structures.
Length of Credit History
The longer you use your credit cards responsibly, the more reliable you prove yourself to be.
This is why it’s recommended not to close your old credit card accounts, even if you don’t use them anymore. This depends on your situation as well, of course – if you’re young and have a short credit history, closing a credit account is likely to hurt your credit score more than if you were in your sixties.
Beware of getting too many new credit cards all at once. When you apply for new credit, there are factors at play that might lower your credit score:
- Opening a new credit account lowers the age of your accounts overall, decreasing the length of your credit history
- Once you use your new credit, the credit utilization goes up, which could potentially hurt your credit score for a little while
- Inquiries – each time you apply for new credit, an inquiry is placed (when a lender makes a request to see your credit records), which slightly lowers your credit rating
New credit isn’t all bad, however. It’s a good way to improve a bad credit score if you have a bad payment history and want to start from scratch on a different account, and it also gives you more available credit, which can lower your credit utilization overall.
Tip 3: Make Repayments Multiple Times a Month
So, paying on time is important.
What doesn’t seem so obvious at first glance, however, is that making your repayments multiple times per month might actually help you indirectly build your credit as well.
When you pay more frequently (such as weekly or biweekly), you:
- Are less likely to have late payments due to the habit of paying regularly
- Are more likely to pay in full each month because you have a better overview of your card balance
- Are keeping your credit card balance low, which decreases your card utilization rate, leading to a better score
- Will pay lower interest fees because you won’t carry any outstanding balance over
We know it can be difficult to keep up with such frequent repayments, especially if you’re a beginner, so here are some tips to help you along:
- Set up automatic payments on your account – technology will do the rest
- Be mindful of your purchases and keep track of everything you buy with your credit card
- Prepare a budget for each month and stick to it
- Do not max out your credit card – always aim to keep card utilization low
- Check your statement at the end of every month to review how you’ve done and to see if there have been any unauthorized charges or errors
Tip 4: Make Small Purchases with Your Card Regularly
Inactive credit card accounts face the possibility of being closed by lenders after a certain period of time. This could negatively impact your credit score by changing your credit utilization rate and the length of your credit history.
To put things simply – if you get yourself a credit card, try your best to actually use it on a regular basis. The best way to do so responsibly is to make small purchases and repay in full, which will keep your credit utilization low and your payment history stellar.
And building credit isn’t the only benefit here! While many people use credit cards to build a credit score to buy a house, a car, or secure a loan, credit cards have some great short-term perks, such as rewards and cashback.
Who doesn’t want to financially benefit from shopping, right?
You can get a rewards credit card based on your preferences, such as:
- Travel credit card – allows you to earn points or miles on travel purchases and exchange these for cheaper flights, hotel room upgrades, etc.
- Cash-back credit card – lets you earn back a certain percentage of every qualifying purchase
- Points credit card – rewards you with redeemable points for every qualifying purchase
If you want to use your rewards credit cards to their full potential while shopping online, try out a browser extension like Lever. At checkout, Lever always chooses the best card for you, so you’re free to shop more and calculate less!
Tip 5: Avoid Having Too Many Credit Cards
While there’s no set answer for how many credit cards you should optimally have, always make sure you’re able to manage all your credit cards responsibly before applying for new credit.
The average American has four credit cards, however, it’s best to start out with one and then slowly increase the number if need be. There are actually some perks to having multiple credit cards:
- You can have a mix of more credit types, which boosts your credit score
- You’re able to spread your spending across more cards and therefore keep the utilization rate low on all of them
- You’re free to pair different rewards cards to maximize the rewards on your spending (for optimal use, let Lever do the work of choosing different rewards cards for different purchases)
In order to manage many credit cards, however, you should ideally be in a stable financial situation and have some experience. Otherwise, you could hurt your credit score by:
- Having too many late payments
- Closing inactive accounts
- Applying for new credit too often
Can You Build a Credit Score Without a Credit Card?
Yes, you can! Here’s how to build credit without getting your own credit card:
- Pay off installment loans responsibly
- Request to have your monthly bills (rent, cellphone, electricity, etc.) added to your credit report
- Get a credit builder loan and make monthly payments
- Become an authorized user on someone else’s credit card
However, getting a credit card is by far the easiest way to build an excellent credit score.
Frequently Asked Questions
Why do I need a credit card?
A credit card is the best way to build credit because it shows you’re able to manage your debt repayments regularly. If you use your credit card frequently and always repay on time, your credit score is bound to improve.
Some credit cards also offer great financial benefits, such as cash back or points rewards.
How is credit score calculated?
A credit score is usually a three-digit number that’s calculated based on complex factors, such as credit history, late payments, amounts owed, or the different types of credit accounts you have.
There are three main credit bureaus that provide credit scores: Experian, TransUnion, and Equifax. As for the credit score itself, the most common type used by lenders is a FICO score (a number between 300-850 where 300-579 means poor and 800-850 means excellent).
How long does it take to build credit with a credit card?
It usually takes around six months to generate a good credit score with your credit card. The longer you build, the better.
How can you build a credit score fast?
If you’re building your credit from scratch, it will take at least six months to generate a good score. In order to boost your credit rating, you can pay more than the minimum payment each month, increase your card limit to lower your utilization rate, or consider getting a credit-builder card.
Credit cards may seem complex at first glance, but the more you learn about them, the simpler things get.
While debit cards might look preferable to some – there’s no debt, after all – they don’t actually help you build any credit, which can negatively impact your financial future.
When you get your first credit card, remember to always pay in full each month, keep your credit utilization low, and avoid applying for too many credit cards at once.
Also, consider getting a rewards card – cash back or points are always a plus! For the best use of rewards cards when online shopping, install the Lever extension and enjoy a stress-free shopping experience.