effectively build credit with a credit cardUpdated: July 19, 2018

The goal of building your credit, while commendable, can be difficult to achieve, especially if you’re someone who has bad credit or limited credit. This is in no small part due to the fact that credit, like many aspects of personal finance, can feel somewhat mysterious for those who are unfamiliar with it. Luckily, there are some tried-and-true methods for improving your credit reports and scores, such as using a credit card to effectively build credit. Continue reading as we discuss how using a credit card can help someone with poor or limited credit improve theirs and see which cards are the best picks to help you effectively build credit.

What makes a credit card a good tool for building credit?

The way our system is currently set up, lenders use metrics like credit scores to gauge how likely a consumer is to pay back borrowed money. This means that creditworthiness, or the ability to be granted new credit, favors individuals who have successfully repaid credit in the past. Because building credit can involve going into debt, it can be tricky for those who have made mistakes in the past or who haven’t borrowed and thus lack a proven track record to access new credit. While going into debt is necessary to build credit, it’s important to note that not all debt is created equal. For example, some debt can have a long life, like a mortgage, and other debt can come with a high interest rate that costs you more over time. When it comes to building credit, a good rule of thumb is to only take on debt that is affordable and can be paid off quickly and easily. A credit card is great for this because:

  • Credit cards allow you to choose how much you spend, as opposed to borrowing money all at once in a lump sum (like with a personal loan, which is a better option if you’re looking to consolidate significant debt). With the freedom a credit card provides, you can opt to use the card for things you can already afford (e.g., groceries or your phone bill), allowing you to build credit while operating within your existing budget.
  • So long as you haven’t reached or exceeded your credit limit, you can still borrow more money, which makes a credit card less likely to put you into harmful debt than, say, a payday loan. Additionally, if you’re using your card responsibly, you can periodically increase your credit limit, allowing for more flexibility in your finances.
  • Credit cards are arguably one of the most accessible forms of lending. While many loans and other types of borrowing require good to excellent credit (typically considered to be credit scores of 700 or higher), there are credit cards for people with average, fair or even limited or no credit. What’s more, many of these cards are designed to help you build and maintain good credit while using them.

How can you use credit cards to effectively build credit?

While credit cards are a great tool for building credit, the consequences can outweigh the benefits if you aren’t practicing responsible use. Here’s what you need to know in order to use a credit card to successfully build your credit:

1. Don’t apply for too many credit cards at one time. One behavior that can impact your credit is the opening and closing of credit card accounts. Applying for a new credit card results in a credit inquiry, which can have a slight negative affect your credit scores. It isn’t a huge deal if you only apply for one credit card, even if you get turned down, but applying for multiple credit cards at once will knock down your credit scores quite a bit. Additionally, requesting a bunch of new credit at once might make you look desperate and like an irresponsible borrower. Closing cards can likewise have an impact, as the amount of available credit you have access to – also known as your credit utilization ratio – decreases when you close out cards.

2. Maintain a solid credit utilization ratio. As noted above, your credit utilization ratio is a metric that compares how much credit you’re using to all the credit available to you, and it’s measured as a percentage. For example, if you have a credit card with a $400 credit limit and a $100 balance, your credit utilization ratio is 25% – divide $100 by $400 to get that. If you have multiple credit cards, your credit utilization ratio is calculated based on the entire amount of credit available to you across all your accounts. Regardless of how large your credit limit is, it’s generally advised that you use no more than 30% of your available credit at a given time. Anything higher is likely to have a negative impact on your credit. This means that you will want to come nowhere near reaching or exceeding your card’s credit limit. The best way to avoid this problem is to keep your spending relatively consistent while paying your balance down or off completely every month. If you can’t pay it off, try to pay as much as you can budget for, so you can free up more of the available credit. Also, if you’re having a hard time paying off your credit card debt, consider transferring the balance to a new credit card offering a long 0% intro APR, as it will allow you to avoid interest for an extended period of time while you pay off the balance.

3. Pay your bill on time. Credit card payments are a recurring monthly expense, just like your other bills, which means that you can plan for them. Rather than paying manually every month, you should consider scheduling automated payments that will reduce or clear your balance entirely, or get into the habit of paying off all your purchases as you make them. The big benefit of doing this is that you guarantee that you’ll never be charged a late fee or have a missed payment reported to the credit bureaus. Even better, keeping a balance of $0 month-to-month also prevents interest from accumulating, keeping your costs down.

4. Check your statements often. Another good practice is looking at your billing statements every month, both to analyze your spending habits, which can help to identify any problem areas that could keep you from paying off your balance, as well as detect any potential errors. Undetected issues on your statements, in the long run, can lead to problems like being overbilled, double charged or missing fraudulent charges that could indicate possible identity theft.

Which credit cards are best for building credit?

The final consideration you’ll have to make is which credit card works best for you. While many cards require you to have good or excellent credit, there are still quite a few cards that don’t. We’ve broken down the best options for people with average or fair credit (scores ranging in the low 600s to 699), as well as those with poor or limited credit (any credit score below 600).

Best cards for average to fair credit

For those who have merely average credit, there are cards that exist explicitly to improve your scores. The cool thing about these cards is that even though they’re offered to those with less than the best credit, they still have plenty of great perks like many of the rewards cards we review.

Discover it Cash Back

effectively build credit with a credit cardThe Discover it Cash Back card is a solid choice for individuals with an average to excellent credit score (around 670 or higher) who are looking for a credit card that offers the kind of benefits usually reserved for people with good to excellent credit. The card provides a 14-month 0% intro APR on purchases and balance transfers (note that there’s a 3% balance transfer fee), as well as a cash back match bonus for first year cardholders — this means if you earn $500 in your first year as a cardholder, Discover will match that $500 to give you a total of $1,000 back! Cardholders can earn 5% cash back in quarterly rotating categories (up to the quarterly max, currently $1,500, before going to 1%) and 1% cash back for everything else. From now until the end of December, the highlighted categories are Amazon.com and Target, perfect for the holiday season. Users must enroll in these categories, but Discover sends reminder emails to help you remember. The card has some additional perks perfect for someone who is working to build credit, like free copies of your TransUnion FICO scores to help you keep your credit on track, and a number of security features like Freeze it, which allows cardholders to “freeze” their card from their smartphone or computer if it goes missing, and identity theft protection alerts. On top of all this, there is no annual fee associated with this card. It also has no foreign transaction fees, which is ideal if you plan to travel overseas.

Capital One QuicksilverOne Cash Rewards Credit Card

effectively build credit with a credit cardThe Capital One QuicksilverOne Cash Rewards Credit Card is a good pick for those with average credit or poorer who would like to earn rewards with their credit card. Although it has an annual fee, it is a reasonable $39 a year, and this card offers the ability to earn a straightforward 1.5% cash back on every purchase, which means you don’t have to worry about spending caps or category signups. As encouragement for responsible credit card habits, this card grants access to a higher line of credit after cardholders make their first 5 payments on time. Finally, as a bonus for Spotify lovers, cardholders can get 50% back as a statement credit on their Spotify Premium subscription from now until April 2018 when they pay for it using their Capital One QuicksilverOne Cash Rewards Credit Card.

Capital One Platinum Credit Card

effectively build credit with a credit cardThe Capital One Platinum Credit Card is a no-frills card specifically for individuals with limited or average credit. Unlike many of the cards for this demographic, the card forgoes an annual fee, something that is likely to alleviate some of the financial burden for people on a budget. In addition, cardholders can gain access to a higher credit line after their first 5 on-time monthly payments. Additional features, like $0 fraud liability for stolen and lost cards, online and mobile access to your card as well as the ability to choose your own payment date, give cardholders an additional layer of security and convenience.

Best card for poor, limited or no credit

Those who have limited to absolutely no credit or very poor credit usually benefit the most from secured credit cards, which are designed to help cardholders build credit. Given that these cards rely on deposits made in advance as collateral and do not require a credit check, they are available to anyone who can afford to put money down at the start, and are a safe way to build credit easily. Some even offer the ability for you to earn cash back rewards.

Discover it Secured

effectively build credit with a credit cardThe Discover it Secured card is a phenomenal choice for someone who wants to build credit. As its name implies, the card charges absolutely no annual fee. In addition, it has a minimum deposit of $200 and a maximum deposit of $2,500, which means you won’t necessarily be hampered by a small spending limit, something that’s often the case with secured cards. At 8 months, Discover will automatically begin reviewing your account to see if you qualify to be transitioned to an unsecured line of credit – making this an excellent choice for effective credit building and growth. This card reports to all 3 credit bureaus — Equifax, Experian and TransUnion – to help you improve your credit scores across the board, so long as you’re paying each month. On top of all that, the card has cash back bonuses of 2% at restaurants and gas stations on up to the quarterly maximum, currently $1,000 in combined purchases, and 1% for all other purchase. Plus, as a first-year cardholder, you’ll earn a dollar-for-dollar cash back match bonus at the end of your first year – not exactly the kind of bonus you’d expect from a secured credit card. In other words, you’re earning an effective 4% back at restaurants and gas stations and 2% on all other purchases for the first year.

Effectively building credit is no small task, especially if you’re starting from a place of limited credit or your credit has been wrecked. The good news when it comes to credit is that it’s always possible to improve, and responsible credit card use is just one way you can do that. For more information regarding building and managing your credit, keep reading our credit monitoring blog.

Disclaimer: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This content was accurate at the time of this post, but card terms and conditions may change at any time. This site may be compensated through the credit card issuer Affiliate Program.