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Used well, a credit card is one of the best ways to build your credit history and improve your credit scores. Credit cards are a convenient way to pay for things you need, but they're also an avenue to increase your creditworthiness and unlock more borrowing options down the line.
That said, if you aren't careful to manage your credit card responsibly, your first card can also do damage to your credit and lead you into debt. The key is to consistently keep your balances low and make on-time payments. Here are six simple tips to help you build credit with your credit card.
1. Always Make Payments on Time
Paying all your bills on time has the single biggest impact when you're trying to build credit. Payment history is the most influential factor in calculating your credit scores, making up 35% of your FICO® Score☉ Θ. Beyond building your credit score, on-time payments also show on your credit report and indicate to lenders that you can manage credit well.
On the other hand, late payments hurt your scores and remain on your credit report for seven years. Even one 30-day late payment can do damage to your credit score. The further past due an account becomes, the greater the impact may be.
Key takeaway: Pay your credit card bill by the due date each month. It's generally best to pay off your whole balance to avoid interest charges. But, as a top priority, always pay at least the minimum due to avoid damage to your credit and fees. Set up automatic payments to ensure you always pay on time.
2. Keep Your Credit Utilization Ratio Low
Your credit utilization ratio is the amount of credit you use compared with the amount of credit you have access to. To calculate your credit utilization on your credit card, divide your balance by the card's limit and multiply by 100 to get a percentage.
Example: Say you have a $1,000 balance and your credit limit is $5,000. Crunching the numbers, your credit utilization ratio is 20%.
Credit scoring models calculate utilization rates for each individual credit card as well as across all your credit cards if and when you get more.
To keep your credit utilization low, pay down your balance each month. Raising your credit limit also decreases your utilization, but the very best strategy is to pay off your balance each month. That way, you'll also avoid paying any money in interest.
Key takeaway: Aim to always keep your credit utilization below 30% and, ideally, under 10%. The lower, the better.
3. Stick to a Budget With Your Credit Card
Your first credit card can be a win for building your score, but it can also lead you into debt if you treat your card like free money. Tamp down temptation by coming up with a plan for how you'll use your card.
One way to avoid going over budget with your new card is using it to pay only one or two bills a month. That is, don't use it to do your monthly spending; just set up a bill or two to automatically charge to the credit card, such as a streaming payment or gym membership. Then, make sure you pay off the balance.
Key takeaway: Try to use your credit card the same way you would a debit card. Create a budget outlining how much you can afford to spend in each category each month. Then, use your card alongside your budget.
Learn more: How to Budget Using a Credit Card
4. Keep Your Credit Accounts Open
Keeping your credit card open over time helps you grow the age of your accounts, which has a positive impact on your score. So, even if you stop using your card much or upgrade to a card with greater perks down the line, it's usually a good idea to keep your first credit card open.
There are some cases where you might decide keeping a card open isn't worth the benefit to your credit: for example, if you have a high annual fee. It's sometimes possible to downgrade a credit card with an annual fee to a different card through the same lender. That can help you keep a credit card open to avoid a hit to your credit without having to pay an unnecessary fee.
Key takeaway: Closing your oldest credit line will decrease the average age of your accounts. So, to grow your score, avoid closing old accounts—even if you've moved on to a new card.
Learn more: An Essential Guide to Your First Credit Card
5. Don't Open Too Many Accounts at Once
Your first card may be serving you so well that you're considering opening another. Perhaps you're interested in leveraging your everyday spending to earn rewards, for example.
But be strategic about how and when you decide to apply for a new card, even if you're ready for an upgrade. Multiple credit checks on your credit report in a short span of time can signal risky borrowing habits to lenders.
Your credit scores can take a small hit every time there is a hard inquiry on your credit reports, which occurs whenever you apply for new credit. So once you have a credit card, it's wise to stick with that card for a while.
Key takeaway: Aim to spread out applications for new credit cards by about six months. This helps you avoid looking overly dependent on credit when lenders review your report, and minimizes the impact of hard inquiries on your score.
6. Check Your Credit Regularly
Part of responsible credit management is keeping an eye on your credit report. This helps you stay mindful of how your habits are impacting your score.
You can check your FICO® Score for free to see where you stand. Beyond watching your good credit management skills move your score in the right direction, watching your credit helps you stay on the lookout for any errors. If you notice unrecognized activity on your credit report, you have the right to dispute it.
Key takeaway: Signing up for free credit monitoring can help you stay aware of changes to your credit as they occur. Plus, you'll see personalized insights into how you can further improve your score.
Building Credit Takes Time
Getting your first credit card and using it well opens the door to more borrowing opportunities over time. Building credit is a process, so stay the course to see improvements. Focus on using your card for purchases you already make and paying off your balance in full, if possible. Avoid using your credit card for purchases you can't afford to repay within the grace period.
When you are ready for a new card, review credit cards that fit your credit profile so that you're only considering cards you're likely to qualify for. Pick a card that aligns with your goals, such as a travel credit card or a card with a 0% introductory APR period, and begin your credit-building journey.