How To Build Credit with a Credit Card: The Ultimate Guide
Key Takeaways
- Credit cards offer one of the best ways to build or rebuild credit.
- Building credit with a credit card boils down to developing good credit habits.
- Paying your bills on time and maintaining a low credit utilization rate will have the biggest impact on your credit-building or rebuilding efforts.
- How long it takes to build credit with a credit card depends on whether you are building credit from scratch or rebuilding bad credit.
- Using a popular scoring model like FICO as your guide will help you prioritize your credit-building efforts.
Building credit from scratch or rebuilding bad credit can seem like a daunting task. However, if you develop good credit habits, you will find the process of building credit with a credit card much easier.
7 Steps to Build Credit with a Credit Card
To build credit with a credit card, you have to use a popular scoring model like FICO as your guide.
The following steps will help you prioritize your credit-building efforts by focusing on the factors used in FICO estimates.
Pay credit card bills on time, every time
Developing a consistent pattern of timely payments is the most important step in building credit. A record of regular on-time payments is a strong signal of responsibility.
The more responsibility you can prove with credit (as reflected by a pattern of consistent timely payments), the higher credit agencies will rate you, which reflects as an increase in your credit score.
This is evident in the fact that payment history constitutes 35% of your FICO Score – the most popular scoring model used by lenders – and 41% of your VantageScore.
Keep a low credit utilization rate
How much credit you use compared to how much credit you have available – also known as your credit utilization rate – is another crucial factor in building credit.
To scale up your credit score, you have to keep your credit utilization low. This means using 30% or less of your available credit.
Example: If you’re carrying a $300 balance on a credit card with a $1000 credit limit, your credit utilization rate is 30%. However, if you have the same $300 balance on a credit card with a $10,000 credit limit, your utilization rate would be 3%.
Credit utilization is the second biggest factor used in FICO score estimates.
Slow down on new credit applications
Another factor that affects your credit score is the length of your credit history. Length of credit history constitutes 15% of your FICO score and includes metrics like the average age of your accounts – a number that goes down each time you open a new account.
New credit applications can also result in a hard inquiry which can lead to a temporal drop in your credit score. What this means is that slowing down on new credit applications can help you keep a longer average age of accounts as well as reduce the number of inquiries on your credit report.
What’s more, if you make multiple credit applications in a short period of time, it will reflect multiple inquiries on your credit report. Most lenders will translate this as an act of trying to get as much credit as you can which portrays you as a bad credit risk.
What this means is that you have to slow down on new credit applications if you are looking to build credit with a credit card.
Use your credit card regularly
Length of credit history, which is one of the factors used in estimating FICO scores also takes into account the frequency of credit usage.
Because the frequency of credit usage is a key consideration in credit scoring, it is important not to leave an account dormant if you are looking to build credit.
While you don’t have to max out your accounts to build credit (which would be counterproductive), you want to keep your credit card accounts active.
Request a credit limit increase
Increasing your credit limit can lower your utilization rate. As pointed out earlier, a lower credit utilization rate can improve your credit score. With a higher limit, you can increase your spending without dramatically increasing your utilization rate.
Increasing your credit limit can help you attain the ideal utilization rate of 30% or less even with increased spending as long as the increase in spending is not commensurate with the increased credit limit.
If you maintain a low utilization rate and make timely payments, the bank may increase your credit limit. However, you can also contact your card provider to request a credit limit increase.
Add to your credit mix
Having a good mix of debt impacts your credit score positively. A good credit mix shows that you can handle different types of credit accounts at a time.
Your total credit mix consists of the different credit accounts you hold such as credit cards, car payments, and mortgage payments (which are all classified as different credit accounts).
Now, this doesn’t mean you should open multiple credit accounts just because you want to improve your credit mix. You have to be strategic with how you use credit cards as using them unwisely can hurt your score.
Do not close a credit card account
When you close a credit card account, you also close all the credit history associated with it. As pointed out in a prior section, credit history is a huge component of what makes up a high credit score.
The more history you have, the higher your credit score is likely to be. You should always keep your credit card accounts open even if you don’t use them because that keeps your credit history intact.
How Long it Takes to Build Credit With a Credit Card
How long it takes to build credit with a credit card depends on whether you are building credit from scratch or rebuilding bad credit.
If you have no credit
If you are building credit from scratch then you have no credit score. This doesn’t mean that your credit score is zero either. It just means that there is no information to calculate your credit score since you have not used credit before.
So how long does it take to get your first score when you start using credit? It depends on the credit scoring model used and how quickly a lender reports information about a new account to credit bureaus.
For example, it can take up to six months to get your first FICO score. If you develop good credit habits, you will get a good starting score which you can continue to build.
Here are the five FICO credit score ranges:
- Poor: less than 580
- Fair: 580 to 669
- Good: 670 to 739
- Very Good: 740 to 799
- Exceptional: 800 to 850
While it’s unlikely that your first credit score will be the lowest (300), it also doesn’t mean that you will start out with the highest (850) either. A reasonable expectation would be somewhere in the middle range (580–669 or 670–739).
If you have bad credit
If you have bad credit, you will need a good deal of patience and good credit habits to rebuild your credit profile.
So how long does it take to rebuild credit if you have a poor score? It’s hard to say how long it takes to rebuild credit since there are different scenarios of bad credit.
Research published by FICO and CNBC shows that minor delinquencies like a late mortgage payment can take up to three months to recover from the resultant drop in your credit score while major delinquencies like defaulted payments can take up to eighteen months to recover from.
More serious delinquencies like home foreclosure and bankruptcy can take three and six years respectively to recover from the resultant drop in your score.
How to Build Credit With a Credit Card Fast
While making timely payments, keeping a low utilization rate, and improving your credit mix can help you build credit, you can supercharge your credit-building efforts by taking extra steps.
To fast-track your credit-building process:
- Become an authorized user
- Get a secured credit card
- Apply for a credit-builder loan
- Try Experian Boost or UltraFICO
- Make regular timely payments, keep a low utilization rate, and develop a good credit mix
How to Rebuild Credit if You Have a Bad Score
A good place to start rebuilding bad debt (excuse the pun) is to focus on paying off existing debts. However, the effort that can have the biggest impact on your attempt to rebuild credit is making on-time payments.
This is because payment history is the most important consideration in FICO score estimations (35%).
You can rebuild credit with a credit card regardless of the nature of bad debt you have accumulated if you develop good credit habits like paying off existing debts, making on-time payments, and maintaining a utilization rate of 30% or less.
How long it takes to attain a good score and how much increase you can expect will depend on your credit situation.
To rebuild credit if you have a bad score:
- Pay off existing debt
- Get a secured credit card or consider one of the best credit cards for bad credit.
- Apply for a credit-builder loan
- Dispute credit report errors
- Make regular timely payments, keep a low utilization rate, and develop a good credit mix
How to Build Credit From Scratch if You Have No Credit History
You need credit to build credit. However, you won’t get credit without credit (again, excuse the pun). By that, I mean that a lender won’t extend you a line of credit without a way of evaluating your creditworthiness (using a credit score) and you need to use credit to build a credit score.
How do you solve this chicken-and-egg problem? That’s where secured credit cards come in.
Unlike regular credit cards, secured credit cards require an upfront cash deposit to open the account. The cash deposit serves as a form of collateral that minimizes risk to the card issuer.
The security deposit required to get a secured credit card typically ranges from $200 to $2500.
A secured card can help you build a credit score that eventually qualifies you for a regular credit card. However, obtaining a secured card is just the first step.
To build credit from scratch:
- Get a secured credit card
- Become an authorized user
- Apply for a credit-builder loan
- Build credit with a store card
- Make regular timely payments and keep a low credit utilization rate.
Conclusion
You can build or rebuild credit with a credit card if you develop good credit habits. It all boils down to proving that you can follow through on credit obligations and use credit responsibly.
How long it takes to attain a good score will depend on whether you are building credit from scratch or rebuilding bad credit.
You can fast-track your credit-building efforts by becoming an authorized user, getting a secured card, or applying for a credit builder loan.
How to build credit with a credit card quiz
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FAQs
What is the fastest way to build credit with a credit card?
There isn’t one way to build credit fast that’s perfect for all scenarios. However, there are multiple ways to build credit fast. The approach to take depends on your credit situation.
How long does it take to build credit with a credit card?
It depends on whether you are building credit from scratch or rebuilding bad credit. If you are building credit from scratch, you can attain a fairly good score in a couple of months. If you are rebuilding credit, it can take anywhere from a few months to a couple of years depending on the nature of bad debt you have.
Is a credit card the best way to build credit?
Credit cards offer one of the best ways to build or rebuild credit.
How much should I pay on my credit card to raise my credit score?
Paying your bills on time and in full will impact your credit score positively. If you cannot pay in full, ensure to make the minimum payment due.
Will a store card help me build credit?
Yes, you can build credit with a store credit card.
Can a prepaid card build credit?
No, you cannot build credit with prepaid cards because they do not report to credit bureaus.
How can I track my credit-building efforts?
You can keep track of your credit-building efforts by checking your credit score monthly.
Sources
- VantageScoreaccessed on November 1, 2022
- Experianaccessed on November 1, 2022
- FICOaccessed on November 1, 2022
- CNBCaccessed on November 1, 2022
- Equifaxaccessed on November 1, 2022
- Federal Trade Commissionaccessed on November 1, 2022
- Consumer.govaccessed on November 1, 2022
- Debt.orgaccessed on November 1, 2022
- Corporate Finance Instituteaccessed on November 1, 2022
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