Credit Cards

4 Secrets to Using a Credit Card to Build Credit

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These four tips could make a difference in whether your credit card improves your credit score.

Key points

  • Many companies you want to do business with use your credit score.
  • Credit cards can help you build a good credit score.
  • You must use your cards responsibly to help you build credit.

Credit cards are useful tools when it comes to building credit. Building a strong credit history Getting a good credit score requires you to borrow, and credit cards can be one of the easiest and most effective ways to do it.

But if you’re using credit cards to help improve your credit score, you want to make sure you use them wisely. In particular, here are four tips to help you make sure your credit cards are helping, rather than hurting, your credit-building efforts.

1. Don’t open too many credit cards at once

If you’re working to build a strong credit history and get a good score, it’s good to have a mix of different types of loans on your credit history. But while you’ll ideally want some credit cards, as well as other types of debt, like a car loan, personal loan, or mortgage, you don’t want to apply for too many cards at once.

Every time you apply for a credit card, you get something called an inquiry on your credit record. This occurs when the card issuer checks your credit report. Each new query remains on your record for a period of two years.

Unfortunately, if you get a lot of inquiries about your report in a short amount of time, this can be a cause for concern because it can lead future lenders to believe that you’re taking out a loan and assuming too many financial obligations. You don’t want to lower your score by requesting tons of cards at once, so be patient when adding new cards to your wallet.

2. Avoid carrying too large a balance

Your credit utilization ratio is another important factor that determines your credit score. Utilization ratio refers to how much of your available credit you use. You can calculate your credit utilization ratio by dividing the amount of money you owe by the total amount of credit your card issuers extend to you. For example, if you owe $500 and have a $1,000 line of credit, you would have a utilization ratio of 50% ($500/$1,000).

If you don’t use much of your available credit, lenders will see you as a more responsible borrower. As a result, a lower utilization rate helps increase your score. However, if you max out your cards, this can raise red flags. A utilization ratio above 30% will generally affect your credit score, so you should definitely try not to use more than this amount of the credit that was issued to you.

3. Pay your cards on time

Paying your cards on time is crucial if you want to use credit cards to build credit. Your payment record is reported to credit reporting agencies, and payment history is the most important factor in determining what your credit score will be. If you pay more than 30 days late, you will seriously damage your credit history and can significantly lower your score.

4. Do not close old credit cards

If you have old credit card accounts open, you’ll want to keep those accounts active. This is because the average age of your credit is a key factor in determining your credit score. The longer your credit history, the better your score, and closing old accounts lowers the average age of your score.

Closing old cards can also have an adverse impact on your credit utilization ratio. If you have two open accounts with a credit limit of $1,000 each and you’ve loaded $500 on one card and nothing on a previous card that you don’t use much, your credit utilization ratio will be 25% ($500/$2,000). But closing that old account and losing access to that line of credit would push your ratio to 50% and hurt your score.

By making sure you follow these four tips, you can maximize the chances that your credit cards will help you build a great credit rating over time. This can make a big difference in many aspects of your financial life.

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