Determined to Build Credit? Four Ways to Make the Most of a Credit Card

• Author: Mary Singleton
• Posted: 2024-11-08

A good credit history enables you to borrow money when you need it in the future. Maintaining a great credit score can also help you receive the best interest rates on loans, housing, and insurance. If your credit history is less than stellar, you may consider using a credit card to rebuild credit. Without the proper strategy, however, a credit card can increase financial burdens instead of eliminating them. A look at the four best ways to make the most of a credit card can help ensure that you get your credit score back into the premium state that you deserve.

Apply for a Secured Credit Card or a Starter Credit Card

If you have a poor credit score, fancy credit card companies may reject your application. However, this is not a reason to panic or lose hope. Instead, consider applying for a secured credit card or a starter credit card. A secured credit card requires a cash deposit that acts as the credit limit whenever you use the card. For example, if you deposit $200 onto a secured credit card, then the card will have a $200 credit limit for any purchases. This security deposit lowers the risk for the credit card issuer, making this a great option for people with bad credit.

Similarly, you can find comparable opportunities with starter credit cards or second-chance card programs. Be sure to read the fine print to ensure that there are no excess fees and that the card company reports to all three major credit bureaus. These extra steps can maximize your ability to repair past mistakes and potentially raise your credit limit in the future.

Make Consistent Purchases and Pay on Time

The purpose of obtaining a credit card is to demonstrate to creditors that you understand debt and that you can pay off purchases on time. If you never use the card, then creditors will have no proof that you can meet payment deadlines. This lack of payment history can make it harder to borrow money in the future. While you never want to max out your credit card, a simple formula to demonstrate responsibility is to use at least 1% (but never more than 30%) of your available credit. In other words, make a small purchase each month, and then pay it off in full after the statement period closes (but prior to the due date). By paying off a small balance in full every month, you can also avoid interest and make owning a credit card much more affordable.

Become an Authorized User on a Trusted Account

If you have struggled with applying for a card or using it on your own, consider becoming an authorized user on someone else's account. Authorization means that you can receive a card connected to that person's account and make small purchases against that credit limit. While the account holder is responsible for making payments, the payment activity appears on the credit report of any authorized user. This is a great way to pool resources until you have the confidence to branch out on your own.

Keep in mind, however, that it is imperative to honor any financial agreements with the account holder. While primary account holders are legally responsible for transactions, they can also remove authorized users for any reason. Demonstrate trustworthy behavior to avoid getting cut off on grounds that your connection is detrimental to a credit account.

Consider Using Your Bank as a Viable Card Issuer

Some people believe that it is harder to obtain a credit card with a major bank. However, centralizing your accounts may result in a higher earnings rate and lower fees than other options. If you do not have a bank account, consider signing up for a starter checking account and then applying for the corresponding card. And if you already have a bank account, ask about the existing rewards cards. While individuals with bad credit or limited credit history may need to pay an annual fee, banks typically revise this requirement for cardholders who demonstrate responsible behavior for at least one year. In addition, many banks allow you to link accounts and set up automatic bill pay. This is a great way to build credit history by making a consistent purchase and automatically paying it in full each month.

Rebuilding credit history after a setback can feel challenging at first. But with the right credit card strategy, you can put yourself back on track to obtaining an excellent score.