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Are you wanting to help your credit score? One of the easiest ways is getting a credit card. If you get one without an annual fee, you can build your credit score for free. In addition to building your credit, you also have access to a financial lifeline when you have a large unexpected bill or you travel away from home and don’t want to carry a huge sum of cash.
The Right Way to Use Credit Cards to Build Credit
Credit cards have a bad reputation in many circles because too many people don’t know how to properly use them. Instead of helping their credit score, they go into credit card debt and are stuck with expensive monthly interest payments and a damaged score.
Although the news headlines like the focus on the record amounts of credit card debt ($1 trillion and climbing), following the tips below ensure you won’t go into debt and you will actually help your credit score:
- Always pay your balance in full every month
- Only charge regular monthly expenses to your credit card
- Don’t use more than 20% of your credit limit
Only Charge Your Main Expenses to a Credit Card
Probably the easiest way to make sure you don’t carry a credit card balance is to only charge your core expenses to a credit card. When you buy groceries or put gas in your car, charge it to your credit card instead of paying with your debit card.
For all other purchases, continue using your debit card or paying with cash.
To build your credit score with credit cards, you don’t have to charge every monthly expense to your card. You only need to develop a pattern of paying off your monthly balance on time to build your score.
In fact, keeping a low balance also safeguards you from using more than 20% of your credit card limit. Your credit score can be negatively impacted or not grow as quickly if you use most of your available credit each month – even when you pay the balance in full every month.
If you’re still concerned that you might carry a balance, make a payment the same day or use a free service like Debitize that handles the payments for you.
Apply for a Card With No Annual Fee
Some people might say you should apply for a loan to build a credit history. This is a bad idea because you pay a monthly interest rate. If you can get 0% financing this idea might make sense, but an even better idea is getting a no annual fee credit card.
By getting a credit card without an annual fee, you can truly build your credit for free. By only charging your core monthly expenses, you won’t carry a balance and pay the sky-high 20% interest rates.
While you’ll see an initial dip in your credit score because of the application and new account opening, regular monthly payments your score will quickly recover and begin to grow.
Get a Rewards Credit Card
Banks and credit card companies can only see how much you spend each month with your credit card, they don’t see what you buy.
In addition to building your credit score, you need to choose a credit card that earns travel miles on your most common purchases. These rewards points can be redeemed for cash back or award travel so you can save money on future purchases.
Rewards credit cards specialize in some of the following areas:
Regardless of which credit card you choose, make sure it earns at least one point per $1 spent. This is the industry average. Anything less isn’t a good option unless you don’t qualify for a better card yet.
Secured vs. Unsecured Credit Card
If your credit score is already above 600, you should qualify for an unsecured credit card. This is good news because secured credit cards usually require a security deposit, sometimes charge an annual fee, and don’t earn rewards points.
When secured credit cards are your only option, you might have to own it for a year before you can upgrade to an unsecured card. We all have to start somewhere and secured credit cards are still a better option to establish a credit history.
How Much Can a Credit Card Help Your Credit Score?
Applying for a new credit card has a temporarily negative effect on the following credit score categories:
- Payment History
- Credit Age
- Total Open Accounts
- Number of Hard Inquiries
After three months of timely payments, your score should return to its pre-application level. Within 18 months, you should begin seeing the full benefits of owning your new credit card.
Remember that it takes time to achieve an excellent credit score of at least 800. Some of the common traits of excellent credit profiles include:
- No missed payments
- The oldest credit card is at least 10 years old
- Credit utilization per card is below 20% (i.e., Only spend $2,000 when you’re credit limit is $10,000)
- Minimal credit card and loan applications
When To Apply for a New Credit Card To Help Your Credit Score
Although you can apply for a credit card any day of the week, your personal circumstances might influence the ideal time to apply.
Apply Six Months Before Your Next Loan Application
If you plan on applying for a home mortgage loan in the next couple months, you might be better off waiting to apply for a credit card. Either you apply for the home loan first or apply for the credit card and wait six months. Waiting six months lets prospective lenders see you can pay your bill on time every month and your average credit card balance.
Never apply for a credit card if your current loan application is still pending. A home mortgage application can take a month to finalize and your application might be rejected before closing date if you apply for a new credit card during the underwriting review.
Wait For Limited-Time Bonus Offers
If you’re patient, you can wait for limited-time bonus offers for a card you have an eye on. Not every credit card ramps up their signup bonus, but it’s worth a shot. Most seasonal offers are in the summer or late fall when many households are spending money on vacations and other larger-than-usual purchases.
You may also decide to apply when a new credit card catches your eye. The first applicants usually get the best signup offer too as the credit card company tries to attract interest in the card.
Right Before a Big Purchase
Before you book your next vacation or replace your living room furniture set, you can apply for a new credit card. This is an easy way to qualify for the signup bonus if you need to spend between $2,000 and $5,000 in the first three months.
If you don’t have a large purchase on the radar soon, go ahead and apply for your choice credit card to begin improving your score sooner than later.
Summary of How To Help Your Credit Score
Your first credit card might only be a stepping stone to build credit to qualify for better credit cards in the future. By getting a fee-free credit card and only charging your primary monthly expenses to your card is a surefire way to build and therefore help your credit score and live within your means.
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Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airlines or hotel chain, and has not been reviewed, approved or otherwise endorsed by any of these entities.