Using a credit card smartly is one of the best and most effective ways to build your credit history and develop excellent credit scores. Click here for guidelines on establishing a credit history so you can get that first card.
Once you do get that first credit card, you're going to want to use it strategically in order to build your credit history and achieve high credit scores. Here are five key steps:
1. Always Make Payments on Time
Making payments on time is possibly the number one way to ensure that you build a positive credit history. A record of on-time payments is a key factor in a positive credit history.
Most credit cards offer the ability to set up automatic payments for the minimum amount due (or any other amount you select) so that you can never miss a payment by accident. The credit card issuer reports any late payments to the credit bureaus, so do everything in our power to never be late.
2. Keep Your Credit Utilization Ratio as Low as Possible
Your credit utilization ratio is the amount of credit you use on a regular basis compared with the amount of credit you have access to. To calculate it, look at how much you charge on your credit cards each month, then divide that into the total credit limit on all of your credit cards. So if you typically charge $2,000 each month, and your total credit limit across all your credit cards is $10,000, your utilization ratio is 20%.
You want to keep your ratio under 30%—and for the very best scores, under 10%. If your utilization ratio is too high, there are two ways to improve it: Lower the amount of money you put on a credit card each month, or increase the amount of credityou have available to you.
The best way to use credit cards is to pay your balance off each month. That way, you'll never incur interest charges, keep your utilization as low as possible, and build a positive record of making payments on time.
3. Keep Your Credit Accounts Open
Credit scoring models reward users for having a long credit history. So you'll want to keep your credit accounts open for as long as possible. If you close an account, it decreases the average age of all your accounts. So don't open a credit card, use it for a while, close it and hop onto the next one. Find one or two cards that work for you and stick with them.
If you do want to move onto another card, keep old accounts open (and active by making a small charge and paying it off immediately at least once a year, so the issuer doesn't close the account because of inactivity).
Of course, if you're paying an annual fee on a credit card, that may be a legitimate reason to close it if it's not a card you use. However, you can always ask your issuer to convert the account to a no-fee version and still keep your payment history alive.
4. Don't Open Too Many Accounts at Once
Once you do have access to credit, don't apply for multiple cards with abandon. Your credit scores take a small hit every time there is a hard inquiry on your credit reports, which occurs whenever you apply for new credit.
5. Check Your Credit Reports Regularly
You can do everything right—but if it's not reported correctly on your credit reports, it won't matter. It is your responsibility to make sure the information on your credit reports is accurate and doesn't show any signs of identity theft.
You are entitled to one free credit report each year from each of the three credit bureaus, so you should be reviewing them to make sure they accurately reflect your credit behavior. Click here to check your free Experian credit report today.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on January 22, 2018, and has been updated.