Updated: May 04, 2023

How to Build a Good Credit Score with a Credit Card

If you need to build credit, credit cards - when used responsibly - are the best tool to do it. Read on to find out how credit cards can help you build credit.
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Talking about credit cards often leads to warnings about an easy slide into debt. And that’s fair - many credit cards come with sky-high limits and potentially crippling interest rates.

But if you pay your balance in full each month, then you can easily avoid credit card debt.

You need to carefully manage your spending to avoid charging more than you can afford to repay.

If you do charge more than you can afford to pay back, the balance on the card will build and the high-interest rate will make it difficult to pay down.

But if you only charge what you can afford to repay by month's end, then you'll have nothing to worry about.

Credit cards aren’t bad. If you know how to use them responsibly, they can help you build your credit and get a good credit score.

Why Use Credit Cards to Build Credit?

Credit cards are an effective tool for building credit because they're easier to get than most loans and they can be used for things like everyday spending.

Sure, a mortgage can help you build credit, but not if you can't get a mortgage in the first place - and definitely not if you aren't ready to own a home. The same goes for an auto loan.

In that light, building credit can feel like a catch-22. You can't get credit unless you have it, but you can't build it unless you can get it.

Luckily, there are ways to get credit if you don't have it yet, one of the best being secured credit cards.

Here are few offers:

Whether it's a traditional credit card or a secured credit card, if you use it wisely, those actions influence the financial data that credit reporting agencies use to generate your score.

Once you have a credit card, you can use it to make the same purchases you were going to make with your debit card.

Think of it like cash - only spend what you've budgeted and pay the balance in full when your payment is due. (Ignore the minimum payment - paying the minimum only can turn even a small balance into debt over time.)

Think of it this way: if you don’t have the money in the bank to pay for what you put on the card, don’t buy it.

When you use your credit card this way, it becomes a powerful tool credit-building tool.

What You Need to Know to Successfully Build Credit with Your Credit Card

Let's just consider this the golden rule of credit card usage: never charge more than you can afford to repay.

There are credit score myths out there saying that you should maintain a balance to improve your score, but that is absolutely not true.

You simply need to use your credit card to improve your score - you don't need to carry a balance at all.

In fact, maintaining a low or zero balance is great for your credit score. According to credit scoring algorithms, one of the main factors that goes into your score is something called a credit utilization ratio.

This ratio is the percentage of debt you have to the amount of credit available to you. Ideally, your ratio should be 30% or less.

If you don’t have a high credit limit, keeping your use of that line of credit to below 30% gets tough.

That's just another reason to pay your balance in full each month, which will effectively keep your ratio at 0%.

However, after your credit score improves over time, you can ask to increase your credit limit

If you increase your credit limit (without actually using that higher credit limit), then you can improve your credit utilization ratio even more.

Make the request for an increase every 6 months. Watch out for notices from your credit card company too.

Sometimes they’ll bump your limit without you asking. Note that some credit card issuers may require a credit check to increase your limit.

And of course, make sure you always pay on time. Your credit is largely determined by your history of payments. Paying on time (every time) is the best way to build credit with a credit card.

When you get the card, use it for everyday spending and don’t charge too much. Set up autopay on your credit card bill so you never pay late. Do this and you'll be able to build credit without going into debt.

How to Build Credit When Your Score Is Poor

Want to turn over a new leaf and take your credit score from poor to great? The same tips and guidelines as above apply.

However, you may not want to use a traditional, unsecured credit card, especially if you struggled to manage your credit and debt in the past.

It’s too easy to slide into debt with a credit limit that allows you to charge more than you can afford to repay each month.

Try using a secured credit card instead. These are revolving lines of credit, just like unsecured credit cards.

But in order to use a secured card, you need to make a cash deposit first.

Your credit limit is tied to the deposit you make, which helps you avoid charging too much to the credit card.

Since these card are tied to a security deposit, they are also easier to be approved for than unsecured credit cards.

Understand the Score You Work to Build

You know how to build credit with the credit card with the tips above. Now, let’s take a look at why these actions can impact your score and increase it.

First things first: you actually have more than one credit score. There are three credit reporting bureaus (Experian, TransUnion, and Equifax) and many credit scoring models.

All of these models can lead to upwards of 30+ scores. That's why focusing on the number itself isn't as useful as focusing on the range your credit score falls into.

The score that really matters to 90% of lenders along with anyone else who needs to check your credit is the FICO Score. A FICO Score is a number developed by FICO, or the Fair, Isaac and Company.

Credit Score Ranges and Quality

Credit Score Ranges Credit Quality Effect on Ability to Obtain Loans
300-580 Very Bad Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.
580-669 Bad May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.
670-739 Average/Fair Eligible for many traditional loans, but the interest rates and terms may not be the best.
740-799 Good Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.
800-850 Excellent Qualify easily for most loans and lines of credit with low interest rates and favorable terms.

FICO analyzes data about your financial behaviors to understand the level of risk that might be involved in lending to you. Then they give you a score that they believe represents how creditworthy you are.

This number is so important if you want to take out a loan or finance a purchase.

Your FICO Score predicts how likely you are to repay the money you borrow.

Therefore, lenders use it to determine what interest rate they offer you. If you have a low score (appear to be less likely to repay the debt), then you'll be charged a higher interest rate.

If you have a high score (appear to be more likely to repay the debt), then you'll be charged a lower interest rate.

You can only get the best interest rates available if you have an excellent credit score. If your score is poor, the lender will give you a higher interest rate.

How Your Credit Score Can Affect Your Future Mortgage Rate

Credit Score Range 30-Year Fixed Rate Mortgage 5-year fixed rate mortgage 7/1 ARM
620-639 4.684% 4.016% 4.506%
640-679 4.138% 3.47826% 3.96%
660-679 3.708% 3.04% 3.53%
680-699 3.494% 2.826% 3.316%
700-759 3.317% 2.649% 3.139%
760-850 3.095% 2.427% 2.917%

How Your Credit Score Can Affect Your Next Car Loan

Credit Score Range 60-Month new Car Loan 40-Month Used Car Loan
500-589 14.824% 16.325%
590-619 13.74% 15.086%
620-659 9.398% 10.186%
660-689 6.747% 7.599%
690-719 4.656% 5.322%
720-850 3.331% 3.778%

Why do these rate differences matter so much? A higher interest rate translates into a more expensive loan.

The higher your rate, the more you pay for your loan overall. When it comes to large loans like mortgages, this can mean paying tens of thousands of dollars more than someone with a better credit score.

Your FICO Score, Deconstructed

Credit reporting agencies calculate your FICO Score after considering 5 factors. This is where it all comes together, and where you can see how using your credit card can help you build credit.

FICO Credit Score Factors and Their Percentages

FICO credit score factors Percentage weight on credit score: What it means:
Payment history 35% Your track record when it comes to making (at least) the minimum payment by the due date.
Amounts owed 30% How much of your borrowing potential is actually being used. Determined by dividing total debt by total credit limits.
Length of credit history 15% The average age of your active credit lines. Longer histories tend to show responsibility with credit.
Credit mix 10% The different types of active credit lines that you handle (e.g., mortgage, credit cards, students loans, etc.)
New credit 10% The new lines of credit that you've requested. New credit applications tend to hurt you score temporarily. Learn more about FICO credit score

First of all, 35% of your score is based on your payment history. Using your credit card allows you to build that history. If you make payments on time and in full, your history is “positive.” This translates to a better score.

Next, your credit utilization ratio determines 30% of your score. Remember, that’s the relationship between how much credit available to you and how much you actually use.

Managing how much you charge to your credit card can help improve your ratio.

So can making payments early so that your ending statement balance is lower than it would be if you waited until the due date to pay.

The other three factors that go into your score are the length of your credit history (15%), your credit mix (10%), and new credit (10%). Your credit card can also play a role in strengthening these areas.

The longer you use your card, the older your credit history. That’s good news for your score.

Maintaining a mix of credit types is also beneficial. This means having a revolving line of credit (such as a credit card) and an installment loan (such as a student loan or auto loan).

Just make sure you're careful with how many credit card accounts you open (and close).

Frequently applying for new credit could be a bad sign to lenders, making you look desperate for new credit. But closing accounts can hurt you, too.

When you close an account, the average age of your credit history goes down. Remember, older is better in terms of your score. Leave old accounts open if you can.

Use Your Credit Card to Track Your FICO Score

In the past, people needed to pay FICO a $60 fee to see their credit scores. Thankfully, that’s changed.

Nowadays, your credit card can help on this too. Many cards now include your FICO Score on every statement.

You can keep up with your progress month by month as you use your card to build your credit.

Using credit cards can help you build and track credit. Your plastic can work as a financial tool to keep you informed and help you make progress toward a better score.

But you also need to proceed with caution. It’s your responsibility to manage your credit wisely. In most cases, that means managing your own spending behavior wisely.

Set yourself up for success by tracking your spending and keeping a budget. Treat your card like you would treat cash. If you don’t have the money in the bank, there’s nothing to pay off your balance.

To help, you may want to use your card for designated purchases only. Try using a card just for gas in your car or the groceries you buy each month.

Limiting what you put on the card makes it easier to pay off. And those on time, in full payments influence 35% of your credit score!

Building your credit is about more than just bragging rights.

It can impact your financial situation anytime you want to take out a loan, buy a home or car, or need to get approved for something, from credit cards to a rental unit in a competitive market.

Your credit score matters, and knowing how to use your credit card can help you build great credit.

Just keep working towards that goal and you will find success.