One of the most effective ways to build credit is to have a credit card and make smart choices in how you use the card and pay it off. Paying your credit card bill on time each month, along with maintaining a low balance, will be a huge help in building a solid credit score.
Does a Debit Card Help Build Credit?
While a debit card can be a smart way to make sure your spending stays in check, using one won't help your credit scores. When you use a debit card, the funds for a transaction are immediately taken out of your bank account. Because you are not borrowing money, debit card transactions are not reported to the three credit bureaus. Thus, using a debit card does nothing to help you build credit.
Having at least one credit card and using it responsibly is a key way to build credit, along with maintaining a solid track record of making loan repayments on time.
How Does a Credit Card Help Me Build Credit?
FICO® credit scores are the credit scores businesses most often check to analyze your finances before granting credit. There are a variety of factors that go into computing your FICO® credit scores. The two biggest factors are your payment history and your credit utilization ratio. How you handle a credit card account plays a big role in both of those factors.
Your payment history for loans and credit card accounts for 35% of your credit scores. Paying a credit card on time will help you build credit.
Your credit utilization rate accounts for 30% of your credit scores. Your rate, sometimes called a credit utilization ratio, measures the monthly balances on all your credit cards against the combined total credit limit on your cards. Keeping your utilization ratio low will help you build credit.
How to Use Credit Card to Build Credit
If you are turned down for a regular credit card, consider opening a secured credit card. A secured card requires you to make a deposit with the card issuer. Your charges are limited to the amount you have on deposit. When you pay your secured card bill, your spending limit goes back up, so you can make new charges.
Because your own money is on deposit, it is typically much easier to qualify for a secured card. When shopping for a secured credit card, confirm that the card issuer will report your payment history to at least one of the three major credit bureaus. You want to make sure your secured card is actually working to help you build credit.
Major card issuers along with smaller lenders have options for secured credit cards that can help you build your credit history. You can find multiple options for secured cards with Experian's CreditMatch™ tool.
What Are the Best Ways to Use a Credit Card to Build Credit?
Charge only what you can afford to pay off in full each month and automate your credit card bill payment.
One strategy is to use a debit card for most of your spending and carve out just a few purchases each month that you put on your credit card. For instance, you might use your credit card for ongoing subscription services, such as Netflix or Hulu.
Then, to make sure you pay your bill on time, set up an automated payment. Credit card issuers offer this service for free.
If you don't want to use the auto-pay feature, you might consider signing up for up text or email alerts from your card issuer that will remind you when payment is due in a few days. The goal is to help you make on-time payments. Even if you can't pay the bill in full, make sure you pay the monthly minimum due on time. That is one of the key ways using a credit card can help you build credit.
Want to instantly increase your credit score? Experian Boost™ helps by giving you credit for the utility and mobile phone bills you're already paying. Until now, those payments did not positively impact your score.
This service is completely free and can boost your credit scores fast by using your own positive payment history. It can also help those with poor or limited credit situations. Other services such as credit repair may cost you up to thousands and only help remove inaccuracies from your credit report.