Turning eighteen years old in the United States marks a significant milestone. At this age, you can register to vote, apply for a 10-year passport, and get a tattoo without needing parental consent. This milestone also greatly impacts your personal finances, allowing you to apply for a credit card independently and start building your credit history. Keep reading to learn how to build credit with a credit card.
How do I get started?
Using a credit card responsibly is a simple way to establish credit early on in life. But before you can even think about swiping your card, you need to make sure you’re prepared for the responsibility. You can get started by doing credit card research and applying for the appropriate starter card.
Do credit card research
While credit cards are a great tool, they often come with credit card terminology that may be unfamiliar. Once you grasp concepts like annual percentage rate (APR), credit limits, and annual fees, you’re better equipped to compare the various credit card companies and their offerings. You also need to make sure you understand how credit cards differ from debit cards. Additionally, you should research the factors that credit scoring models, such as the FICO scoring model, use to determine your credit score. By doing a little research ahead of time, you can save yourself the worry and stress of not understanding how credit cards work.
Apply for a secured credit card (if necessary)
If you’re brand new to credit or have a less-than-ideal credit history, you might need to start with a secured credit card. These cards act as a starting point for people who are looking to build or improve their credit scores. When opening a secured card, you will be required to pay a security deposit to the credit card issuer. After the initial deposit, the card operates like a regular credit card. You’ll be able to make purchases, pay them off, and demonstrate your responsible credit card usage.
Apply for a student credit card
A student credit card is a beginner card specifically designed for individuals currently in college or planning to attend. Since students might not have a credit history yet, this card aims to assist them in building credit and developing responsible financial practices. When you apply for a student card, it typically offers a low initial credit limit. This will allow you to gain experience with how credit cards function without the risk of accumulating a high amount of credit card debt. Responsible use of both secured and student cards can help you qualify for a card that has more benefits, such as travel perks, later in life.
What is the best way to use a credit card to build credit?
Although many people recommend getting a credit card, they don’t always share how to use them wisely. The best way to build credit– with or without a credit card– is to develop good financial habits. Practicing good money habits with your card allows you to work towards establishing a strong credit history. Here are some credit card tips to help you use your credit card responsibly.
Be picky about your purchases
You should be selective about what you buy with your credit card. Gas and groceries are expenses a credit card could help with, as they are purchases you typically make on a regular basis. However, there are also some things you shouldn’t buy with a credit card. Using a credit card for essential items can help you earn rewards or establish credit without exceeding your budget.
Set up automatic payments
Setting up automatic payments is a convenient way to stay on top of your credit card bills without having to manually pay each statement. By connecting your bank account to your credit card account and choosing automatic withdrawals, you can have peace of mind knowing that your payments will be made on time each month. Automating your payments helps you avoid late fees and contributes positively to your credit score by establishing a consistent payment history.
Keep your credit utilization ratio low
Your credit utilization ratio is determined by dividing the amount of money that you’ve spent in a month by your credit limit, or the amount of money that is available for you to borrow. For example, if you have a $150 credit card balance and a $300 credit limit, your utilization ratio is 50%. Maintaining a low credit utilization ratio shows lenders that you are responsible with managing your credit. This can potentially lead you to qualify for better interest rates on loans and credit cards, making it easier for you to achieve your long-term financial goals.
Pay your statement on time and in full
Every month, you’ll receive a statement that shows your credit card balance. After looking it over, you will need to pay the minimum payment before the due date each month (if you didn’t already set up automatic payments). You can also choose to pay more than the minimum due or the full balance. However, if you fail to pay anything by the due date, the late payment can stay on your credit report for 7 years. By staying on top of your payments, you're actively taking steps towards financial responsibility and healthy credit management long-term.
Avoid opening new credit accounts for a while
It's essential to be mindful of how often you apply for new credit accounts. Having multiple hard inquiries on your credit report within a short period can have a negative impact on your credit score. Lenders may view this as a sign of financial distress or irresponsible behavior. Instead, you should consider spacing out your credit applications over time to demonstrate responsible credit management and avoid a potential dip in your credit score.
Keep your account open
Your oldest credit card account contributes to the overall length of your credit history, which is an important factor in determining your credit score. As you gain more experience with credit, you might consider applying for a loan or another credit card in the future. Instead of closing your first credit card account when you open a new line of credit, consider using it for a small subscription service and setting up automatic monthly payments. Keeping your oldest credit card open and in good standing shows lenders you have a long history of creditworthiness, making you a more appealing borrower.
Monitor your credit report regularly
Finally, you should check your credit report on a regular basis. This can help you spot any errors and make sure all items on the report are accurate. If you notice any discrepancies, take action right away by filing a dispute with the credit reporting agency. Resolving issues early can help protect you from credit card fraud and maintain your financial well-being.
Are there ways to build credit without a card?
If you’re not ready for a credit card or have not been approved, there are ways to build credit in college without the shiny plastic card. In the meantime, you can demonstrate your creditworthiness to lenders by managing a different type of credit account.
Get a credit builder loan
Credit builder loans are loans granted to individuals in order to build the borrower's credit. Unlike personal loans, credit builder loans are offered to people who have no credit or bad credit. As you make regular, on-time payments on the loan, your payment history will be reported to credit bureaus.
Report payments
There are many different services that provide the ability to report monthly expenses like utilities, streaming service payments, and rent to credit bureaus. These financial products created to report payments, like Experian Boost, can help your FICO score because they can show proof of a positive payment history.
Become an authorized user
Becoming an authorized user on a parent or guardian's credit card grants access to their credit line and card. Positive account behavior can help improve your credit, but missed payments by the primary cardholder can also harm your credit. If you're under 18 or seeking to establish a credit history, being an authorized user on someone else's card, typically a trusted individual, can help you begin to build credit.
Establishing credit using your credit card can be both challenging and rewarding. Your credit card simplifies tasks like buying a city bus pass, yet it also adds convenience to temptations, such as online shopping and food delivery. To manage your credit card wisely and avoid overspending, discipline and self-control are essential to resist impulse buying. While building credit with a credit card is straightforward, a good credit history takes time to develop. Starting early, like when you turn eighteen, and sticking to sound financial habits over time is key for long-term success.
