Building and maintaining good credit is an essential part of financial health. Credit cards, when used responsibly, can be powerful tools to help you establish and boost your credit score.
Whether you’re just starting out or trying to improve your score, knowing how to effectively use credit cards can make all the difference. In this guide, we’ll share five essential tips for using credit cards to build great credit.
1. Pay Your Balance in Full and On Time
The most important factor in your credit score is your payment history, which accounts for 35% of your total score. Making your payments on time every month is critical to building great credit. A missed or late payment can have a significant negative impact on your credit score, especially if it’s reported to the credit bureaus.
To make the most of your credit card:
- Always pay your balance in full: Paying off your entire balance each month helps you avoid interest charges and keeps your debt under control.
- Set up automatic payments: To ensure you never miss a payment, consider setting up automatic payments through your credit card account or your bank. You can also set reminders a few days before the payment due date.
By paying your balance in full and on time, you’ll not only improve your credit score but also develop healthy financial habits.
2. Keep Your Credit Utilization Low
Credit utilization—how much of your available credit you’re using—makes up 30% of your credit score. To maintain a healthy credit score, aim to keep your credit utilization ratio below 30%. This means if you have a credit limit of $1,000, try to keep your balance under $300.
Here’s how to manage your credit utilization effectively:
- Pay down balances frequently: Instead of waiting until your billing cycle ends, consider making multiple payments throughout the month to keep your balance low.
- Ask for a credit limit increase: If you’ve been a responsible cardholder, ask your credit card issuer for a credit limit increase. This can lower your utilization ratio as long as you don’t increase your spending.
Keeping your credit utilization low signals to lenders that you’re managing your credit responsibly, which can help boost your score over time.
3. Avoid Opening Too Many Credit Cards at Once
While having multiple credit cards can increase your available credit and lower your credit utilization, opening too many accounts at once can hurt your credit score. Each time you apply for a new credit card, it triggers a hard inquiry on your credit report, which can temporarily lower your score.
Here’s why it’s important to space out credit card applications:
- Hard inquiries: Too many hard inquiries in a short period can suggest to lenders that you’re in financial trouble or seeking too much credit. Each inquiry stays on your credit report for about two years.
- New credit accounts: A new account lowers the average age of your credit history, which accounts for 15% of your credit score. The longer your credit history, the better it is for your score.
Instead of applying for multiple cards at once, focus on using one or two responsibly before adding more credit cards to your wallet.
4. Keep Your Old Credit Card Accounts Open
The age of your credit accounts makes up another 15% of your credit score. A long and positive credit history shows lenders that you’ve managed credit responsibly over time. Closing old credit card accounts can shorten your average account age and increase your credit utilization ratio.
Here’s why keeping old accounts open can benefit you:
- Longer credit history: Keeping your oldest accounts open can help lengthen your credit history, which is beneficial for your score.
- Increased available credit: Closing a credit card account reduces your total available credit, which can increase your credit utilization ratio if you carry balances on other cards.
Even if you’re not using your old credit cards regularly, it’s a good idea to keep them open, especially if they don’t have an annual fee. You can use them for small purchases every few months to keep the account active and continue building your credit history.
5. Monitor Your Credit Regularly
Building great credit requires regular monitoring of your credit report to ensure everything is accurate and up to date. Mistakes on your credit report, such as incorrect late payments or fraudulent accounts, can harm your credit score if left unaddressed.
Here’s how to stay on top of your credit:
- Check your credit report: You’re entitled to a free credit report from each of the three major credit bureaus—Equifax, Experian, and TransUnion—once a year. Review your reports for any errors and dispute them if necessary.
- Use credit monitoring tools: Many credit card issuers and third-party services offer free credit monitoring tools that can alert you to changes in your credit score or report.
By regularly checking your credit, you can spot potential issues early and take action to protect your score.
Credit cards can be an effective tool for building and maintaining great credit when used wisely.
By paying your balance on time, keeping your credit utilization low, avoiding too many new accounts, and monitoring your credit regularly, you can boost your credit score and set yourself up for financial success.
Remember, building great credit takes time and consistent effort, but the rewards—better interest rates, higher credit limits, and more financial opportunities—are worth it.