How To Build Up Credit With A Credit Card
The most popular option to start building credit is with a credit card. Whether it’s a secured or unsecured card, using a credit card properly can be a great way to build a payment history and demonstrate your ability to manage your finances.
Apply for your first credit card
When banks and financial institutions give consumers credit cards, they run a certain risk that the cardholder will not or will not be able to repay their debts. That risk is higher if consumers don’t have a proven credit history, which means that those without credit will most likely find it difficult to approve unsecured credit cards – that is, traditional cards where the debt is not secured by collateral.
This is where secured credit cards come into play. A secured card works similarly to traditional cards, but requires the user to make a cash deposit at the time the card is opened. This cash deposit corresponds directly to the credit limit. For example, let’s say you deposit $ 500 when you withdraw a secured credit card. The bank or financial institution is holding this money and your credit limit is now $ 500, which you can slowly use and pay. This minimizes your bank’s risk because if you stop paying your credit card bill it will be deducted from your first deposit of what you owe. It is this security that makes it easier for people with previously little credit to obtain approval.
While secured cards may seem limited, they are a great way to start building credit as they allow you to make monthly payments, which will steadily increase your credit score over time. If possible, it is ideal to pay off the card balance in full every month. If you can’t pay them off in full every month, make sure you make at least the minimum payment on time, as missed or late payments will cause your credit score to drop. Hence, it is important to make sure that your card is being used correctly and that no mistakes are made.
Become an authorized user with someone else’s credit card
If you are struggling to qualify for your own credit card, becoming an authorized user of another credit card may be a better option. This happens when someone you know – usually a family member – adds your name to their existing account. This gives you the opportunity to make purchases with the card without being responsible for the payments.
However, this is only a good idea if you can trust the cardholder to make their payments on time. Why? If the primary user of the card pays their bill each month, that payment will also be reflected in your credit report, which ultimately increases your score. On the other hand, it means that if the cardholder misses payments or is late, it can hurt your credit instead of helping them.
Don’t miss any payments
Lenders want to know that you will be able to make payments on time, so the importance of non-missed payments in building credit cannot be underestimated. Missing payments will have a negative impact on your score. So whenever you shop with a credit card, you should always know exactly when and how to make your next payment.