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Are you new to credit cards? Do you want to understand how credit cards impact your credit history and how to maximize your credit scores?
Remember, a credit card can be a 100% free way to build up your credit, as long as you use it responsibly.
This is a guide to building and improving your credit with credit cards. You’ll learn:
Throughout the guide you’ll find links to pages and videos that dive deeper into specific topics. Follow all of those to get the most out of this guide.
Once you’re done, we invite you to send us your specific questions. One of us will write back to you right away. We want to know what you find confusing or want to know more about.
Our goal is to help you develop good long-term habits and an understanding of how to establish great credit history. Building great credit takes time and this guide can be a great first step in the right direction.
This is not a guide about using risky techniques to try to manipulate credit scoring systems. Instead, we’ll help you understand the fundamental factors that impact credit scores so you’ll be able to make good decisions and use credit cards to build your scores responsibly.
You also won’t find information on this site about signing up for lots of cards quickly just to get the signup bonus and then cancel them. We want to give you the knowledge to choose credit cards that will be a great long-term fit for you. So, let’s get started!
Your credit history is a record of your past behavior as a borrower of money. Lenders use this past behavior to determine how likely you are to pay money back, or more generally how trustworthy and reliable you are.
People with a long history of on-time payments are seen by lenders as very reliable borrowers, likely to pay loans back on time and in full.
People with bad credit history, including late payments and maxed out cards, are seen as risky borrowers who may not pay loans back reliably. Based on your credit history, a company may decide whether they want to do business with you, and on what terms.
To understand credit history, think of a trusted friend you have known for a long time. How comfortable would you feel loaning that person $300?
Now imagine you just met someone. Would you loan that person $300?
Since you’ve known your friend for a long time, you probably have a good idea of the likelihood of whether he or she will pay you back based on that person’s past behavior.
In the second situation (a stranger) you don’t know about any past behavior. You might not want to loan the money at all. Or, maybe that person is desperate and offers to repay you an extra $50 for taking on that extra risk. You would loan $300 and be promised $350, not knowing for sure whether you’ll actually get paid back.
Let’s take the example a little further. If you made that same $350 for $300 loan to 7 people, and only 6 of them paid you back, you wouldn’t lose any money. You loaned $2,100 and got back $2,100, even though one person did not pay you as promised.
Banks go through a similar process of risk measurement and adjustment when they consider giving you a loan.
When you apply for a credit card or loan, a lender will check your credit reports and scores to determine how likely you are to pay back a debt. Based on this information, they’ll decide whether to approve or deny your application. If the lender decides to approve you, it’ll also use your credit history and scores to decide the terms of your loan, like the interest rates or amount of the loan you should get. This is like the extra $50 in the example above: Lenders tend to charge higher interest rates to riskier borrowers to make up for the fact that more of them won’t pay back the debt as agreed.
Banks aren’t the only ones who use your credit reports and scores to predict your level of risk. Here are several ways your credit history can impact you:
Credit history is recorded on credit reports. There are three major credit bureaus (also known as credit reporting agencies) in the United States:
Each credit bureau collects and maintains data about your credit history in the form of a credit file. file. When you or someone else with a permissible purpose requests access to your credit information, a consumer disclosure (for you) or a credit report (for others) is generated from the information found in your credit file.
Your credit reports contain information about accounts you’ve had and your payment history. See our page about credit reports to learn more about the specific information that’s included (and is not included) on credit reports.
A credit score is a number that indicates your risk as a borrower and the likelihood that you’ll pay your bills on time. Specifically, a FICO or VantageScore credit score predicts the likelihood that you will pay any credit obligation 90 days late within the next 24 months. Credit scores are determined by mathematical models (called scoring models) and are based on information in credit reports.
You do not have just one credit score. FICO is the most commonly used brand of credit score by lenders in the U.S., and VantageScore is another brand that’s gaining popularity. Under each brand there are multiple credit scoring models. FICO also has different industry-specific scores under each scoring model (mortgage scores, auto scores, bankcard scores, etc.).
Since there are three different credit bureaus, each type of credit score could be calculated based on any one of your three credit reports.
Many popular credit scoring models use a range of 300 to 850. A “good credit score” is typically anything above 670, but this is subjective.
It may be tempting to watch your credit scores closely and obsess over every point, but that’s probably not the best use of your time and energy. Credit scoring models are proprietary, so you may not always know exactly why one of your credit scores has gone up or down by a few points.
Instead, focus on the fundamentals of building good credit history. This includes:
As long as you focus on the fundamentals to build good credit history on your credit reports, all your credit scores — regardless of which brand or version — should reflect your good behavior eventually. Remember that lending decisions are not made entirely based on one of your credit scores, but also based on other information you submit on a credit application, like your annual income and your debt-to-income ratio.
Now that we’ve discussed how your credit history is measured, let’s move on to some ways you can monitor your credit.
If you don’t know how to check your credit reports, that’s a good place to start. Errors on credit reports happen, so you’ll want to check all your reports often to correct any inaccurate information.
You can access your credit reports in a few different ways. You are legally entitled to one free credit report every 12 months from each credit bureau at www.annualcreditreport.com. Learn more on our page about monitoring your credit reports, including other places you can see your credit reports.
Because you have so many credit scores, checking and monitoring scores can be a little trickier. However, it can be nice to follow some of your credit scores over time to get a general idea of how good or bad the information on your credit reports looks to lenders.
Since you have so many credit scores and generally won’t know which credit score a lender will check when you apply for a loan or credit card, it’s futile to worry when the scores you’re monitoring go up or down a little over time.
Start by learning a bit about the factors that major credit scoring models consider and how they weigh those factors when they calculate your scores. Once you understand this, you’ll have a better idea of whether a particular action might look good or bad to lenders.
This chart shows the criteria used to create FICO scores and their relative importance in your credit score.
Since many lenders typically view some version of your FICO Score when you apply for credit, many people want to monitor those. Most major credit card issuers have started offering a FICO Score for free at least once per month. See an up-to-date list of places to get some of your credit scores here: How Can I Get a Free FICO Score?
Although VantageScores are different from FICO Scores, many of the same factors are considered and weighed similarly. There are several free services, like Credit Karma, that will let you monitor some of your VantageScores on a regular basis. This can be useful to give you a good estimate of whether you look good or bad to lenders, and if your credit is looking better or worse over time.
If you have fair or bad credit (a FICO Score of less than 670 or so), you’ll likely be able to benefit quite a bit by using the principles described below because you have a lot of ground to cover.
If your credit is already good or excellent (a FICO Score of about 670 or higher), you’ll likely see less of an improvement because you don’t have as far to go, and you’re probably already aware of some or all of this information.
You can certainly build credit without a credit card, but credit cards have many advantages beyond just building credit. Plus, they can be a convenient and easy way to add more accounts to your credit history even if you already have other types of accounts, like installment loans.
Here are some benefits of credit cards to consider:
Credit cards can affect your credit in several different ways, and that process begins as soon as you apply for one (even if you’re denied). The main principle you need to follow is to use your cards responsibly by always paying your bills on time, but there’s more to successful credit card management than that.
Let’s start at the beginning with a credit card application, and move on to how using a credit card will affect your credit. For each aspect, we’ll point out whether it’s likely to have a positive, negative, or neutral effect on your FICO credit scores.
If you don’t already have a credit card, you may not have any credit history established yet. Checking your credit reports and scores in the previous step should give you a decent idea of where you currently stand credit-wise.
This section is about understanding your options for getting a first card. So this step doesn’t have any direct impact on your credit until you decide to actually apply for a card in the next step.
The right first card for you should fit into your purchasing habits and lifestyle. You shouldn’t need to go out of your way to use it. If you already use a debit card to buy things, you could start by making those purchases on a credit card instead.
In general, the better your credit is, the more (and better) options you will have when choosing a card. This means as you build your credit you could be able to qualify for cards that earn more rewards and provide more benefits (like airport lounge access). As you understand credit cards more, you can develop a strategy with several types of credit cards to maximize your benefits and rewards.
Most major banks report credit card account activity to all three major credit bureaus, which is helpful when you’re trying to build credit history. Banks are not required to report to the credit bureaus. Credit reporting is actually voluntary, but most card issuers do report.
Let’s take a look at some of your options for your first credit card:
However, this approach can be overwhelming since there are so many credit cards out there. If you don’t already have much credit established or don’t have a card in mind that you want to get, this option is probably not for you.
You may have received an offer in the mail that says you’re “pre-approved” or “pre-qualified” for a certain card. In many cases, a credit card issuer has already screened one of your credit reports and determined you’re most likely a good fit for one of their cards.
While you’re not guaranteed to be approved for one of these pre-screened card offers, you’re usually more likely to get approved since the issuer has already checked your credit history to some degree. Many major credit card issuers allow you to check for cards that will be a good fit for you on their websites. Sometimes you’ll get bigger signup bonuses or better terms than someone who applies without being pre-screened.
This can be a shortcut to establishing some credit history.
If you know someone with good credit who trusts you (and whom you trust), you could ask that person to add you as an authorized user on his or her credit card account. Most credit card issuers will report activity on authorized users’ credit reports.
One benefit of becoming an authorized user is that it doesn’t require a credit check. Even if you have no credit or bad credit, you’ll likely be able to get a card on your loved one’s account and use it to start building your credit.
The downside of this approach is that any delinquencies from the primary cardholder, like late payments, will also show up on the authorized user’s credit reports too (that’s you).
This is why it’s important to only become an authorized user on the credit card of someone you trust to keep the account in good standing. Only ask someone you know well, like a close friend or family member, who you expect to be financially responsible for years to come.
A credit builder loan is not a credit card. Instead, it’s a special type of loan that’s one of the safest and easiest ways to build credit. We decided to include it here since it can be a great stepping stone to getting your first credit card.
If you’re new to credit, a credit builder loan can be a great way to jumpstart the credit building process. The way it works is simple. You apply for the loan and, if you’re approved, the amount of the loan goes into a special account that you can’t access. Then, you make payments to your lender or credit union every month to pay off the loan.
This loan payment activity is typically reported to credit bureaus (though you should always check with the lender or credit union to verify it reports). Once you’ve paid off the entire loan amount, you get access to the funds plus any interest earned while the money was held in savings.
Credit builder loans are available from many banks, credit unions, and a few online lenders. You may want to check out Self (formerly known as Self Lender), which does not do a hard inquiry on your credit when you apply. Or, if you’re an immigrant to the U.S. and don’t have a SSN, consider Stilt.
Even if you already have credit established, a credit builder loan can add diversity to the types of accounts on your credit reports, which can help your credit scores. For example, if you only have credit cards on your credit report, you may not get maximum FICO Score points for the Credit Mix category. This category accounts for 10% of your FICO Scores, and has to do with the types of accounts you have. By adding a credit builder loan, which is a type of installment loan, you can increase your account diversity.
If you’re a college student, there are special credit cards designed to help you start establishing credit history.
Issuers don’t expect applicants for these cards to have significant credit history already. Learn more about student credit cards here.
If you have bad credit or no credit, banks may think you’re too risky for them to issue you a traditional credit card. Still, you may be able to get a secured card even if you’re new to credit or have past credit issues to overcome.
When you open a secured credit card, you’ll need to make a deposit to establish your credit limit. For example, if you apply for a secured card and deposit $200, you would end up with a credit limit of around $200. Usually, you’ll need to provide bank account information on the application so the issuer can withdraw the security deposit if you’re approved. Sometimes, this deposit goes into a savings account that earns interest.
If you don’t pay your bill on time, the bank keeps this deposit. Banks do this since people with bad credit are more likely to not pay their bills as agreed.
A secured card is meant to be a starting point for building or rebuilding credit so you can eventually qualify for a “regular,” unsecured credit card. Once you’ve used a secured card for its purpose of building credit, you can get your deposit back by closing the card. Some issuers will even let you convert the account to an unsecured card product instead. To learn more about the impact of closing or converting a secured card, watch this video.
If you already have a banking relationship established with a local bank or credit union, you may be able to get a credit card from them. Even if you have no credit history or limited credit history established, your bank or credit union may be willing to extend you credit since you already have an existing relationship.
If you decide to get a credit card from a small regional bank or credit union, ask them whether they report to all three credit bureaus first. That way you’ll know your responsible credit use will be rewarded by establishing credit history on all three of your credit reports.
You’ve probably been asked if you want to apply for a store credit card when you’re making a purchase, whether it was at a checkout line or you were buying something online.
However, store credit cards are generally not as good as regular cards from big banks. They tend to have worse terms, like lower credit limits, than general-use credit cards. Also, many store credit cards can only be used at certain stores instead of anywhere major credit cards are accepted.
Sometimes store cards will come with incentives, like a discount on your first purchase. Store-branded credit cards are often marketed aggressively. As a result, many people who don’t understand how credit works end up in debt or damage their credit history.
Watch this video to learn more about the disadvantages of store cards.
Store credit cards can be a good idea, if you fully understand the terms of the card and shop at a certain brand of stores enough to take advantage of the rewards and benefits provided by the card. Just make sure you understand the role they play in your overall credit card and credit-building strategy.
One upside of store credit cards is that they tend to have lower approval requirements than cards from big banks. This means you might even be able to get a store credit card if you have little or no credit history established. If you have weighed the other options for your first card and think you can benefit from a store card as a starting point for your credit-building journey, it could be a decent option.
Now that we’ve reviewed some of your options for your first card, you may be ready to apply for a credit card.
Usually, applying for a credit card involves filling out a form online. Often, you’ll find out if you’re approved within seconds of submitting the application. Other times, you may need to wait for the credit card issuer to manually review your application and make a decision. If you don’t receive an answer immediately, the issuer will generally mail you an answer within about 7-10 days.
Sometimes an issuer will ask for additional information after you’ve submitted the application. For example, credit card applications ask for your annual income. The credit card company may ask for documents for you to verify your income to make sure you didn’t just make up a number.
When you apply for a credit card, the issuer will check one or more of your credit reports to decide whether to approve you.
Any time you apply for new credit and the lender checks your credit reports, it is called a “hard inquiry.” A record of this hard inquiry will be included on your credit report for two years, and it will be factored into credit scores for one year. The hard inquiry stays on your credit report whether you’re approved or denied, but does not contain information about whether you were approved.
A hard inquiry can potentially have a slightly negative effect on your credit scores, even though it’s a normal part of the credit application process. This is because it shows that you’re actively seeking credit and, believe it or not, that can indicate a higher level of credit risk.
The creators of scoring models review thousands of credit reports whenever a new score is created, and judge how those reports performed over time. Those reports show that the people who apply for new credit more frequently are more likely to pay late than people who apply less often.
A few hard inquiries over the course of the past two years usually isn’t a big deal. But many hard inquiries in a short period of time can be another story. Excessive inquiries might indicate that you’re seeking credit because you’re in a tight financial situation. Frequent hard inquiries, like submitting 10 credit card applications over a 6-month period, may mean that you’re a riskier borrower.
As a result, your credit scores will likely be lower if you have a high number of inquiries. Those lower scores can make it more difficult for you to get approved for new credit.
You don’t have to be afraid to apply for new credit when you need it or want to take advantage of a great offer. However, it’s probably not a good idea to apply for new credit every time you want to save 15% off your purchase at the mall.
If your application for a credit card is approved, the account will now be open. That’s why it’s important to really consider whether you want a card before you apply.
Some people get to this stage and feel buyer’s remorse. This might happen if you were talked into a store card at the checkout line, but then realize the card isn’t actually something you want. You may think that if you don’t activate the card, the account will not be open and will not impact your credit, but this is false.
Once you’re approved for a credit card, it can affect your credit in several different ways — some positive and some negative. But remember, if you’re denied, nothing else will happen. There is no negative consequence to being denied for credit, other than the hard inquiry on your report.
So, let’s look at the ways your credit scores may be impacted by a new credit card account.
Opening many new accounts in a short period of time can be seen as risky financial behavior, because it looks like you’re in need of money and are acting recklessly. This “new credit” factor considered in your credit scores is where the number of inquiries and length of time since your most recent inquiry come into play. The length of time since you last opened an account can also be factored in here.
While every new inquiry and every new account won’t automatically have a negative impact on your scores, there’s always a possibility that it could. The increased risk of having new credit may have a small negative effect on your credit scores.
Luckily this category only accounts for 10% of your total FICO Score, and you can reduce the impact by not opening a lot of new accounts too quickly. The only other way to improve the points earned from this category is to wait until your account is no longer considered to be “new” and any previous hard inquiries have aged over one year.
The older your credit history, the better. If you established accounts a long time ago and have been able to manage them responsibly, that demonstrates to lenders that you’re less risky than someone who doesn’t have a very long credit history.
If you take the length of time each of your accounts has been open and average them together, that’s the average length of your credit history. This average is considered in credit scores because you’re seen as less risky to lenders the longer your accounts have been open. The ages of your newest and oldest accounts are also considered.
When you open a new credit card and already have some older credit cards, you’ll reduce the average age of your accounts. This could potentially have a negative effect on your scores.
If the average age of your accounts is less than about six or seven years, your credit history may be considered to be “short” and you probably won’t get the maximum points available from this category. This isn’t usually a very big deal because this category only accounts for 15% of FICO Scores. So you can still have good credit even if your credit history is short.
There are two potential ways to improve your credit scores within this category. First, you can wait for the accounts on your reports to age. You should be careful about adding new credit accounts, because every time you do you’ll reduce the average age of your accounts.
Second, you can ask a loved one to add you onto an existing, older credit card account as an authorized user. If you’re added onto an older account with positive payment history, it might increase your average age of accounts.
The more diverse the types of accounts that appear on your credit report, the better.
Credit cards are known as “revolving debt,” while personal loans, auto loans, and others are known as “installment debt.” The main difference between these types of accounts is that your balance and payments can go up or down every month with credit cards.
However, the terms of installment loans are fixed at the outset. Being able to manage multiple types of accounts well over time generally shows lenders that you’re a less risky borrower.
When a new credit card is added to your reports, it could improve your credit mix. This might result in a slight credit score improvement. Keep in mind that diversity of accounts is not a significant credit score category. In fact, it only accounts for 10% of your FICO Scores.
If you only had installment accounts on your reports previously, with no revolving accounts, opening a new credit card account might help your credit scores. But if your credit reports are already very diverse and you have a credit card, adding another credit card account should have no effect here.
When you open a new credit card account, you’ll be assigned a credit limit. The credit limit is the maximum amount you can spend on the card at any one time before you need to pay back some of the money you borrowed from the credit card company.
The percentage of the credit limit you use, according to your credit reports, on each credit card and across all credit cards is a major factor in credit scoring models. This is known as your credit utilization rate or debt-to-limit ratio.
Even if you don’t use the card you just opened, the credit limit will show up on your credit reports and will be factored into your credit scores. This additional available credit could lower your overall credit utilization ratio. If it does, the new account could have a significant positive impact on your credit scores, depending on the balances and credit limits of the other credit cards on your reports.
This credit scoring factor really depends on how you use your cards. It’s covered extensively later, and we’ll come back to how opening a new card can help improve this important credit score factor.
Before we come back to credit limits and how you should manage spending on a credit card, let’s talk about the most important part of having a credit card: paying your bill.
The biggest factor in your credit scores is whether you pay your bills on time.
Credit scores are designed to help lenders determine how likely you are to pay your bills on time. If you have a history of late payments, accounts going to collections, or bankruptcy, those are strong indicators that you’re a risky applicant.
Most delinquencies, like late payments, will remain on your credit reports for seven years!
A history of late payments and other delinquent behavior can have a strong negative effect on your credit scores for many years.
Many types of accounts are considered in this scoring category, from credit cards to mortgages to student loans. Your payment history for every account on your reports will be considered, and factors like how late the payment was, how often you were late, and how recently any late payments occurred may all come into play.
If accounts become very late they can be sold to collection agencies. When this happens, a collection account will likely be added to your credit reports as well. Collection accounts can have a strong negative effect on your credit scores. The newer they are, the worse the impact may be.
The most important thing you can do to build and maintain good credit history is to pay all your bills on time. Set up automatic payments to always pay at least the minimum required amount each month. Or, better yet, set up automatic payments to pay the full new statement balance each month. This can help you both stay out of credit card debt and avoid interest completely with most cards.
It’s a good habit to think of your credit card as if it were more like a debit card, which needs to be paid off as you use it, rather than a loan. This habit could help you avoid getting into debt.
Imagine you have a separate checking account and every time you make a credit card purchase you also transfer that same amount into the second checking account. At the end of the billing period, you’ll be able to pay off your statement balance in full using the funds in that second account. This isn’t a very practical example, but it should get you in the mindset of holding money in reserve to pay your credit card bill.
Paying your credit card bill sounds straightforward, but we’ve come this far and still haven’t even talked about what an APR is or what “minimum payment” means.
After this guide, continue onto the next page to learn about how paying a credit card works.
Now you have a new credit card and you’re starting to buy things with it.
Any amount you spend on the card will be added to the balance, which is the amount you owe to the credit card company. A balance could also be called “credit card debt.”
The balance and credit limit of each of your credit cards is very important for calculating your credit scores. These figures could have either a very positive or very negative impact.
30% of your FICO Score is based on the “Amounts Owed” category of your credit reports. It considers information in your reports like:
Credit scoring models look at how much of your available credit you’re using on each card, and how much of your total credit limit is being used across all cards. They do this by calculating the percentage of your credit limit you’re using, as reflected on your credit reports.
This percentage is called “credit utilization” or more specifically “revolving utilization,” since we’re only talking about credit card accounts here. Using a high percentage of your credit limit is seen as very risky. It may indicate that you’re overextended financially and may have trouble paying your bills as a result.
This factor is why maxing out credit cards can cause credit scores to drop dramatically.
To figure out your overall credit utilization, simply add up the credit limits on all of your credit cards. Then add up the balances on all of those cards. The percentage of the total balance compared to the total credit limit is your revolving utilization.
For example, say you have two credit cards, and each one has $5,000 credit limit. You have a balance of $2,500 on one of the cards, and $500 on the other. When you add each of those up, your total credit limit is $10,000 and your total balance is $3,000.
Next, we divide $3,000 by $10,000 and get .3, or 30%. That’s your aggregate or overall revolving utilization rate. It means you’re using currently using 30% of the total revolving credit available to you.
Generally, the lower your credit utilization, both overall and on each individual account, the better it is for your score. One exception is that 0% utilization can technically result in slightly lower credit scores that 1% utilization, but that basically only happens if you pay your bill early or don’t use your credit card.
Let’s go back to how opening a new card might impact your utilization percentage in a positive way…
If, for example, you have only one credit card that has a $1000 credit limit and a $900 balance, you’re at 90% utilization. This would probably have a significant negative impact on your credit scores.
Now, if you open a new card that has a $1000 limit, your new total limit is $2000 with the same $900 balance, reducing your utilization to 45% once the new account is added to your credit reports. That’s still a relatively high utilization percentage, but 45% looks much better to credit scoring models than 90%. So, opening a new card or increasing the credit limits of cards you already have could potentially have a large positive impact on your credit scores.
Credit scoring systems also look at the number of accounts that have balances at all: A large number could indicate higher risk, and may have a negative effect on your scores.
Installment loans are also included here. Scoring systems check for how much of the original loan still needs to be paid off. The more of the loan that’s been paid off, the better. However, this isn’t nearly as influential over your credit scores as your revolving utilization ratios.
Simply put, the lower your balances relative to your limits, the better your scores will be.
This may seem like a lot of information, but it all boils down to some fairly simple principles. When you consider all the various scoring factors we’ve talked about, you can come away with these solid tips for building your credit with credit cards:
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