How to use a credit card to build credit
If you're thinking beyond a quick purchase, a credit card can be a key item in your financial toolbox.
There's a 1-in-10 likelihood that you're credit invisible. This means you haven't found ways to build your credit. You have no credit history and no credit score.
Being invisible might seem impossible given how many of us bank with technology. But if you pay for your expenses with cash, checks, debit cards or even digital wallets linked to a savings or checking account, you may have no credit record.
And being credit invisible isn't terrible. The positive side is that you haven't accumulated a bad credit history.
More good news is that you can change your status from credit invisible by finding ways to build your credit. One way is by building credit with a credit card.
Building credit with a credit card
Credit cards are a revolving line of credit — an opportunity to borrow money now and pay it back later with interest. But when you're building credit with a credit card, it's wiser to think of credit cards as a convenience, not a long-term loan. You don't need to spend more than you can pay off right away to establish a credit record, and this can help you avoid paying interest.
Your first step will be to choose and apply for a credit card. Credit cards come with different features. Four of the most popular credit cards are low interest rate, rewards for future discounts or points for future rewards, cash back, and secured credit cards whose limit is determined by the size of a deposit you have with the financial institution. Learn more about these credit card options and whether they might be right for you.
Video Transcript: How to choose your next credit card
Video Duration: 3 minutes, 20 seconds
Choosing your card: Elapsed time 0 minutes, 0 seconds [0:00]
Sometimes you may receive credit card offers, but how do you know which card is right for you? The right card for you often comes down to your credit history, spending habits, how you manage your repayments and a card's APR, or annual percentage rate—a credit card's yearly interest rate. In general, there are four types of credit cards: rewards points, cash back, low rate and secured.
Rewards points or cash back: Elapsed time 0 minutes, 17 seconds [0:17]
If you pay off your balance each month or at least in a relatively short period, you could consider a rewards points or cashback credit card. Be aware that they typically have APRs starting in the double digits. Both tend to cater more towards those with at least some track record of positive credit usage.
A rewards points card typically offers reward points on qualifying purchases that you can redeem for cash back, gift cards and more. It could also offer miles that could be applied towards travel. You may receive more points in one purchase category over another, such as dining versus gas stations, so picking a card that matches your spending habits maximizes your rewards.
A cashback card is like a rewards points card, but you earn cash back with each qualifying purchase instead of rewards. Although some credit cards pay the same cash back rate regardless of where you spend or what you buy, others may have a cap or earn different amounts on certain spending categories, so be sure to read the fine print. Choosing a card that matches your spending habits can be a good thing to consider.
Low rate or secured card: Elapsed time 1 minute, 27 seconds [1:27]
If you tend to carry a balance from month-to-month or are trying to build credit, consider a low-rate or secured card.
A low-rate card usually doesn't accumulate rewards or cash back, but instead typically has a lower APR. The lower the rate, the less it will cost you in interest to carry a balance into the next billing period. The actual APR will vary depending on your credit profile and other factors.
A secured card offers you a spending limit based on the security or deposit you place with the card issuer and is best suited for someone looking to establish or re-build credit. Credit card issuers may be more willing to approve someone with little to no credit history, or someone with damaged credit history, if there's a deposit that covers the amount that can be borrowed on the card.
Additional considerations: Elapsed time 2 minutes, 12 seconds [2:12]
In addition to the APR and the type of rewards or cash back, you'll want to consider any promotional rates that may be offered for a limited time period, fees associated with the card, penalties for missed or late payments, and any other terms and conditions. Military members and those who travel should consider any foreign transaction fees that a credit card may have.
You'll also want to consider other benefits associated with the card like extended warranties, travel protection or price protection to name a few. You can find out more by reading the credit card's terms and conditions.
Pick a card for your budget: Elapsed time 2 minutes, 43 seconds [2:43]
So which credit card should you choose?
The credit card that matches you, which means being honest with yourself about your spending habits and how you manage repayments. It also means avoiding the temptation to apply for a card just because of the rewards without considering the interest rate or annual fee. Ask yourself: Do the benefits outweigh the potential cost? At the end of the day, managing your credit card usage in a responsible manner can help set you on the path to financial security.
Visit usaa.com/creditcards to learn more about the credit cards USAA has to offer.
[Description of visual information: The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.
Bank products offered by USAA Federal Savings Bank, Member FDIC. Credit card, mortgage and other lending products not FDIC-insured.] End of description.
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Generally, you need to be at least 18 years old, if not 21, and have proof of ability to repay to get a credit card in your name. Any credit card — a retail store credit card or a credit card from a bank — will typically begin reporting your credit activity to the credit report agencies. Carefully research your choices before making a selection. Compare the credit cards' terms:
- Annual percentage rate (APR) on purchases and cash advances
- Any introductory offers like 0% APR or bonus rewards and how long after you open the credit card those terms apply
- Credit limits for purchases and cash advances
- Fees and penalty charges
- Benefits, such as rewards, purchase protection or cash back
- Security features, like the ability to lock a credit card temporarily
Remember, APRs vary based on different factors, and most credit card APRs are variable – they change as an index rate, like the Prime Rate, changes. How much you might have to pay in interest could go up. If the index rate goes up and you carry a balance, you will have to pay more in interest. If the index rate changes, the lender does not have to notify you in advance. But as long as the lender notifies you in advance, they have extensive permission to change the terms of your credit card.
Building credit as an authorized or joint user
If you're not at least 18 years old or you are but don't have income yet, you may consider other ways to build credit.
A family member or spouse can make you an authorized user on their credit card. This means that the transactions for that credit card become part of your credit history, but you're not responsible for paying the bill. You can stop being an authorized user without closing the credit card. Parents may want to learn more about adding an authorized user to their credit card and what it means to them.
You may also open a joint credit card account with another person. Joint accounts mean that all parties can be held jointly and severally liable for the debt, regardless of who made the transaction. Whether the activity on the account helps or harms your credit standing depends on how well the card and its payments are managed.
Making purchases when building credit
OK, you've chosen, applied for, been approved and received your credit card. Now what?
Plan how much you want to spend and what types of purchases you want to use this convenience on. For example, you may want to choose one consistent expense that you already know fits into your budget, like pet food or gasoline.
It's best not to buy anything with your credit card that you don't have the money to buy without your credit card. If that means your max credit card purchase is $20 a month, that's fine. There's no need to overspend when building credit with a credit card.
You may be tempted to turn to your credit card for emergencies. Emergencies are stressful, and you want to calm yourself, your partner and your family by solving the crunch quickly.
But if you don't have the money available to pay off the credit card in full, you're only postponing your stress, and possibly stopping yourself from the goal you set in the first place: building a positive credit history with your credit card. Your goal wasn't building debt.
Instead, work to create an emergency savings fund before you get a credit card and keep working to maintain or even grow that fund.
Paying your monthly credit card balance
Hopefully, this is the easiest part of the process: Pay for what you charged on your credit card and get your balance back to zero.
You'll have some time between when the month's billing cycle closes and the minimum payment due date. These days are called the grace period. Never make a payment later than this deadline. A late payment of 30 days or more will stay on your credit history for up to seven years and impact your credit score, not to mention any additional fees or penalties you may incur.
On-time payments that take your balance to zero also prevent you from having to pay any interest.
You can make as many payments each month as you want — more frequent and smaller payments might make more sense for your budget. Or, if you're looking to avoid paying too much in interest, paying your bill off gradually means that when the lender calculates your interest each month based on your balance, you can ensure that balance is low. Making more payments each month also means your credit utilization — your ratio of debt to available credit — is at its lowest when the billing cycle closes. That can help you rebuild your credit.
How long does it take to build credit?
Building credit with a credit card doesn't ever stop. Your credit history exists as long as you live, and the more years of good borrowing you have on record, the better.
According to Experian®,See note1 one of the three major credit reporting companies, it will take three to six months to establish enough positive credit history with a credit card to get your first credit score. You may not have an excellent score right away. It may take a few years of responsible borrowing and repaying to reach the highest scores.
Once you reach a score that you're happy with, try not to close the credit card that got you started toward this goal. Keeping your oldest credit card open for years to come could positively contribute to your credit score. Closing that credit card could hurt your credit score because your credit utilization may increase by not having that credit card balance available anymore.
You don't need to charge up that longtime credit card, although making purchases occasionally, following the same careful process you did when you were starting out, can be helpful. Some retail stores or other credit card sponsors will close inactive credit card accounts.
The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.