How to Build and Improve Credit with Credit Cards

Highlights: 

• Lenders generally report your credit card activity to the three nationwide consumer reporting agencies (NCRAs), making credit cards an excellent option for improving your credit scores over time.
• If you're looking to build your credit history or improve your credit scores, you may consider applying for a secured credit card or a student credit card.
• When using a credit card to build your credit history or improve your credit scores, be sure to pay special attention to your payments, credit utilization ratio and credit mix.

Credit cards can be reliable tools for building your credit history or improving your credit scores, but it's how you use them that really counts. You'll need to choose the right type of card, stay on top of what you owe and take steps to understand your credit utilization ratio and other factors.

Using credit cards to help build and improve credit

Lenders generally report your credit card activity to the three nationwide consumer reporting agencies (NCRAs )—Equifax^®, Experian^® and TransUnion^®. In turn, the NCRAs use this and other borrowing information to form the basis of your credit reports and credit history. If you're careful with your spending and use your credit cards responsibly, they can help you build or improve your credit history over time.

However, if you lack a credit history and have low or no credit scores, you've probably encountered a paradox: How can you qualify for a credit card in the first place? In this case, you might consider applying for a secured credit card or a student credit card. You could also become an authorized user on a loved one's existing account.

Secured credit cards

Secured credit cards function like traditional credit cards, but they require a cash deposit when you open your account. This deposit is usually equal to the credit limit on the account and acts as collateral. Should you default on your payments, your lender can use your deposit to reimburse itself. Your deposit is generally returned when you close your account, provided you've kept up with what you owe.

The threshold for approval is generally lower on secured cards, making them more accessible to inexperienced borrowers. But they aren't without their downsides. Many secured cards have high interest rates and other fees. Plus, you'll only be able to access the card if you have the cash to cover an up-front deposit.

Student credit cards

If you're an undergraduate, graduate or nontraditional student, you may qualify for a student credit card.

Student credit cards aim to help young people with little to no credit history. As a result, they generally have more flexible application requirements than traditional cards.

In exchange for this flexibility, student credit cards often come with lower credit limits and higher interest rates. Also, they are not available to all borrowers. If you're not a student, you won't qualify for this type of card. Student borrowers could lose card benefits after graduation.

Authorized users

If you can't qualify for a credit card of your own, don't give up hope. You might instead become an authorized user on another person's account.

An authorized user is someone added to a credit card account by the primary account holder. Both the primary account holder and the authorized user can use the credit card as their own. In turn, all information associated with the account will apply to both users' credit histories. However, only the primary account holder is legally responsible to pay off charges.

When included in your credit reports, positive information from an authorized user account can help you build or improve your credit history.

However, it's important that you and the primary account holder both practice responsible borrowing. If the primary account holder has a history of missed payments or other negative behavior, your credit history is unlikely to benefit. Similarly, any negative credit behavior on your part could hurt the primary account holder's credit history.

How to improve your credit scores with a credit card

Securing a new credit card or becoming an authorized user on someone else's account is only the beginning of your credit journey. Now you'll need to know how to use your new card to your best advantage. Setting healthy credit habits and improving your credit scores means paying careful attention to your financial behaviors—and it all starts with your payment history, credit utilization ratio and credit mix.

Payment history. Your payment history—including on-time, late and missed payments—often has the largest impact on your credit scores. So, keeping up with your payments is one of the most important steps when trying to build your credit history or improve your credit scores with a credit card.

For starters, make sure you know when your minimum payment is due each month. If you miss a payment, know that your lender will generally wait 30 days from the due date to report the information to the three NCRAs. Even a single late payment can do serious harm to your credit scores.

Credit utilization ratio. Your credit utilization ratio—the amount of revolving credit you're using divided by the total credit available to you—is one tool that lenders use to evaluate how well you're managing your existing debts. The higher your credit card balance, the higher your credit utilization ratio will be.

Lenders typically like to see a credit utilization ratio of no more than 30%. If you're looking to improve your credit scores with a credit card, you'll need to spend well below your account's credit limit. Avoid excessive credit use and pay off your balance in full each month if you can.

Credit mix. Adding a new credit card to your wallet may also improve your credit mix, which refers to the different types of credit accounts you have. Your credit scores may benefit from having a good balance of different types of accounts. This includes revolving accounts, such as credit cards and lines of credit, and installment accounts, such as student loans and mortgages.

In general, lenders like to see that you've been able to manage different types of credit accounts over time. Opening a new credit card account can diversify your credit mix, especially if you don't already have other revolving credit accounts.

You'll need to remember that a new credit card is not a silver bullet and will only help improve your credit scores if you use the account responsibly. Do your best to get a credit card with a low interest rate, make payments on time and pay off your balance in full each month, when you're able.