The Smartest Ways to Use a Credit Card to Build Credit

Credit cards are a useful tool to get your credit history into great shape. It doesn’t matter if you’ve no credit or bad credit—using credit cards responsibly has many advantages. Apart from helping to improve your credit score, many credit cards offer cashback, discounts, rewards, purchase protection, and other benefits—in fact, credit cards have many more benefits than using cash.

Or course, as with any tool, you have to use it correctly. Credit cards with high-interest rates, large spending limits, and extortionate late payment penalties can send your debt spiraling out of control. So, if a credit card is like a tool—think of it as a sharp knife. In the right hands—like a surgeon or chef—it’s useful and absolutely necessary to get the job done. But in the wrong hands, it can do a whole lot of damage.

This article aims to show you the smartest ways to use a credit card. You’ll also find out how using a credit card is one of the best ways of improving your credit score. We’ll also let you in on the secret benefits of using credit cards without racking up a pile of debt.

How to Use a Credit Card to Build or Repair Credit

You probably already know that when you apply for a loan, credit card, mortgage, or even a job, someone will check your credit score. If your score is non-existent or you’ve got bad credit, chances are you’re in for a tough ride. The worst that can happen is your application gets knocked back, and—boom—your hopes for a new car or home are shattered. If you do get approved, you’ll probably get whacked with high-interest rates. So, let’s face it, you don’t want to deal with either scenario. 

Where should you start building your credit? America’s Debt Help Organization says the easiest way to establish a positive credit history is to apply for a secured credit card or a department store card. The smart way to use these credit cards is this: always pay your bill on time each month.

A word of caution—make sure the card provider you choose reports to the three credit rating bureaus, Experian, TrustUnion, and Equifax. If you’re not sure, check with the company before you take out a card. After six months or so, you should have established an excellent credit history that allows you to apply for an unsecured credit card. 

Of course, you may need more time if you are repairing bad credit. Read this article to find out more ways of fixing your credit score fast. 

The 4 Smartest Ways to Use Credit Cards

Let’s look at the four essential habits to use a credit card responsibly. Following this advice will help keep you out of debt and see your credit score steadily improve. 

The good news is that getting your credit score into the “good” and “excellent” categories allows you to apply for credit cards with benefits. At the end of the article, you will find out what those bonuses and benefits are.

1. Pay credit card bills on time

Paying on time applies to all your bills—including your credit card. There is nothing better to improve your credit score than a history of on-time debt payments. To make sure you never miss a payment, set up direct debits, or a reminder on your smartphone.

2. Pay more than the minimum

Every month, pay as much—ideally the full amount—of your credit card bill as you can. Never settle for just the minimum. If you always pay the minimum, you’ll end up paying a boatload in interest charges. You also run the risk of debt getting out of control as your spending starts creeping up to reach your spending limit.

3. Keep your balance low

One of the smartest ways to control credit card spending and bump up your credit score is to keep balances low. The credit bureaus use a term called credit utilization. This is basically the ratio of the amount you use to your available credit. 

Here’s an example. If you have a spending limit of $3,000 and you owe $2,500—you have high credit utilization. This is bad when it comes to your credit card score. 

What is the best spending advice? Keep the amount you owe on your credit card at less than 30 percent usage. So, if you’ve got a $3,000 limit, never owe more than $300 on your card.

4. Regularly check your monthly statement

Always be in the habit of checking every item on your credit card statement for accuracy. It is easier to sort out problems as soon as they occur rather than a few months down the line. You never know, you could have been a victim of identity fraud.

The same is true if your card is lost or stolen. Report it immediately and you could save yourself big time if someone misuses your missing card. 

The Benefits of Using Credit Cards

Apart from building an excellent credit history, what are the other benefits of using credit cards responsibly? Can it really be true that paying by credit card is better than cash? Yes, and here’s why.

Free money with cashback programs

Who doesn’t savor the chance of getting their hands on some free cash? If you’ve got a credit score of at least 700, you could be in for some nice treats when using your credit card. 

Some credit cards offer cashback rewards programs where you get some money back when making purchases. Depending on the type of card, the reward can be between one and six percent. 

Other examples of rewards and bonuses include: 

  • Earn miles for every $1 spent
  • Get free travel
  • Gift cards
  • Free insurance on purchases
  • Discounts on car rental

Before taking out a reward card, it’s essential to read the terms and conditions. For example, you may have to pay an annual fee after the first year or cashback and rewards might only be available on certain purchases. In most cases, cashback offers or rewards only kick in after you spend a certain amount within a specific time.

There are two things to watch out for with credit cards that offer cashback: 

  • Studies show that folks tend to spend more with a credit card than they would with cash. So, only use a cashback card to buy items you would normally.
  • Some cashback credit cards have an annual fee. So, do the math on how much you’re likely to “earn.” Some of these cards can cost upwards of $100 per year.

Using Credits Cards the Smart Way

Apart from their convenience, credit cards—when used responsibly—can help to boost your credit score quickly. When you achieve a good credit rating, you may qualify for other credit cards that offer many rewards and bonuses.