The Definitive Guide to Building Credit with Credit Cards

John Ganotis

John Ganotis

Updated Dec 21, 2016

This is a guide to building and improving your credit with credit cards. You’ll learn how your credit is affected simply by owning a credit card, and some easy tips for keeping your credit in great shape.

Your credit is an important indication of your reputation as a borrower of money, telling lenders how likely you are to pay back a debt. When you apply for credit cards, loans, and some other financial tools, the lender will check your credit to determine if you should be approved or not, and what interest rates you should get.

The better your credit is and the higher your credit score, the more easily you’ll be approved when you want a credit card or loan. You’ll also get more competitive interest rates and extra benefits compared to people with worse credit.

This means that building up and maintaining your credit is an important part of your financial life, and will literally save you money as you improve it. Read on to learn the many ways that credit cards interact with your credit reports and scores.

Insider Tip: Are you confused by credit card statements, and wondering how your activity is reported to the credit bureaus? Check out our guide on How Paying A Credit Card Works for a timeline of how credit card payments and statements are processed.

If you have any questions or feedback, get in touch with us anytime. Just use the ASK button in the top right corner of any page of the site.

How’s Your Credit Now?

If you don’t know how to check your credit report and score, start there. After all, you won’t know if your credit has improved if you didn’t know where it was in the first place.

You can access your credit reports and score in a few different ways. Learn how to Monitor Your Credit using free services (you should start here if you don’t know the difference between credit reports and credit scores). There are also many easily-accessible credit cards that offer free access to your credit score, and some of them are quite rewarding.

It’s also important to understand a bit about how credit scores are calculated. Once you do, you’ll be able to know if a particular action might be good or bad for your credit.

What’s In Your Credit Score?

This chart shows the criteria used to create FICO scores and their relative importance in your credit score.

If you have fair or bad credit (a FICO® Score of less than 700 or so), you’ll be able to benefit quite a bit by using the principles described here because you have a lot of ground to cover.

If your credit is already good or excellent, you’ll 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.

Building Credit with Credit Cards

There are many types of credit cards out there: reward, travel, retail store, student, secured, business.

The right card for you should fit into your shopping habits and lifestyle, and you shouldn’t need to go out of your way to use it. The better your credit is, the better the credit cards you can get (more rewarding, better extra benefits).

Any credit card you use will affect your credit, as long as the issuer reports to the credit bureaus (don’t worry, they usually all do). In some situations business cards will act a bit differently, but they’re a special case.

Credit cards will affect your credit in many different ways, and that process begins as soon as you apply for one (even if you’re denied). The main principle is to use your cards responsibly and always pay your bills on time, but there’s much more to it than that.

Insider Tip: If you have bad credit you won’t be eligible for the most rewarding credit cards, which require excellent credit. If you’re in this situation try secured credit cards, which require an initial security deposit but other than that function like normal credit cards.

Let’s start at the beginning with a credit card application, and move on to how owning and using them will affect your credit. For each aspect, we’ll point out whether it has a positive, negative, or neutral effect on your credit scores.

Applying for a Credit Card

When you apply for a credit card, the issuer will check your credit report with a hard inquiry to see if you should be approved or not.

This hard inquiry will then be included on your credit report, where it will have a slightly negative effect on your credit score.

This is because it shows that you’re actively seeking credit, and many hard inquiries in a short period of time can indicate that a you need a loan because you’re in a tight financial situation. This means that you are a riskier borrower, so your credit score will go down to reflect that.

The good news is that hard inquiries don’t do much damage to your credit score. They’ll stay on your credit report for up to two years, but they’re only counted in your credit score for one year. So you usually don’t have to worry much about them.

Insider Tip: Not sure if you’ll be approved for that credit card? Learn how to check to see if you’re prequalified for any offers without hurting your credit score.

Opening a New Credit Card

If you’re approved for a credit card, it will affect your credit in different ways, some positive and some negative. If you’re denied, nothing else will happen – there is no negative consequence other than the hard inquiry on your report.

When a new credit card is added to your credit report, it will affect every area of your credit score. Let’s take a look at how that happens.

New Credit (10% of your score)

When you get a new credit card, that will obviously affect the New Credit category. Opening many new accounts in a short period of time is seen as risky financial behavior, because it looks like you’re in need of money and are acting recklessly.

This increased risk will have a small negative effect on your credit score.

Luckily this category only accounts for 10% of your total score, and you can reduce the effect by not opening a lot of new accounts quickly. The only other way to improve this category is to wait until your account is no longer considered to be “new.”

Average Length of Credit History (15% of your score)

The longer your average credit history, the better. When you open a new credit card you’ll reduce the average age of your accounts, and this will have a small negative effect on your score.

If the average age of your accounts is less than six or seven years, your credit report is considered to be “short” and you won’t get the maximum points from this category. This isn’t a very big deal because this category only accounts for 15% of your score, so you can still have very good credit even if your credit history is short.

The only way to improve here is to wait and be careful about adding new credit accounts, because every time you do you’ll reduce the average age of your accounts.

Diversity of Accounts (10% of your score)

The more diverse 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 is that your balance and payments can go up or down every month with credit cards, but the terms of installment loans are fixed at the outset.

So, adding a new credit card with revolving debt could increase the diversity on your report and may have a small positive effect on your score. This is a small category, only contributing 10% of your credit score, so it’s not a good idea to open new accounts simply to increase your account diversity.

If you only had installment debt on your report previously, with no revolving debt, this will make a relatively big impact. But if your credit report is already very diverse, adding another credit card account will have little or no effect here.

Insider Tip: Wondering how several credit cards will affect your credit? Check out our Q&A Video: Will I Build Credit Faster with Multiple Credit Cards?

Your Balance and Credit Limit

The balance of your credit card, along with the credit limit, are very important factors for calculating your credit score. They’re included in the Amounts Owed category, which accounts for 30% of your credit score.

Your balances and credit limits can be either very positive or very negative for your credit score. Credit scoring systems look at your “credit utilization,” which is a measure of how much of your total available credit you’re making use of.

To figure out your 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 credit utilization.

For example, say you have two credit cards that each have a $5,000 credit limit. You are also carrying a balance of $2,500 on one of the cards, and $500 on the other. So, your total credit limit is $10,000, and your total balance is $3,000.

Now, we divide $3,000 by $10,000 and get .3, or 30%. That is the credit utilization.

The lower your credit utilization, the better it is for your score. People with excellent credit scores tend to have a utilization around 7%, though most experts recommend that staying below 35% utilization will get you a great score in this category. That’s why maxing out your credit cards is not a good idea.

Insider Tip: Many card issuers will automatically increase your credit limit over time, but you can also request a credit limit increase yourself (recommended about once every 6 months, but be aware that this will probably initiate a hard inquiry).

Q&A Video: Does Having a 0% Utilization Hurt My Credit Score?

There are a couple other aspects in the Amounts Owed category to be aware of.

Credit scoring systems also look at the number of accounts that have balances at all: a large number indicates higher risk, and that has a negative effect on your score.

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.

Simply put, the lower your balances, the better your score will be.

Your Payment History

This is another very important category, amounting to 35% of your credit score.

Lenders want to know if you’re going to pay your bills on time, so a history of late payments and other delinquent behavior will have a strong negative effect on your credit score.

Many types of accounts are considered here, from credit cards to mortgages to student loans, among others. Your payment history for all of them will be considered, and factors like how late the payment was, how much was owed, and how recently it occurred will all come into play.

If accounts become very late they can be sold to collection agencies, becoming collection accounts. These will have a strong negative effect on your credit score. The newer they are and the larger the debts, the worse the effect will be.

So, it’s very important to always pay your credit card bills on time, and not just to avoid a late fee. Set up automatic payments to always pay at least the minimum required amount each month.

Insider Tip: If you want to dig a bit deeper into late payments, check out our Q&A Video: Will Late Payments Always Show Up On My Credit Report?

Putting It All Together

This may seem like a lot of information, but it all boils down to some fairly simple principles. When you consider all the various effects we’ve talked about, you can come away with these solid tips for building your credit with credit cards:

Tip 1: Don’t Apply for Too Many Cards in a Short Period of Time

  • The hard inquiries will have a slight negative effect on your credit
  • You’ll increase the amount of new credit on your credit reports
  • You’ll lower the average age of your accounts

Tip 2: Keep Your Balances Low

  • Keep your total utilization on all of your cards as low and close to 1% as possible
  • The fewer accounts with balances, the better
  • Request a credit limit increase from your card issuers every 6 months or so

Tip 3: Always Pay Your Bills on Time

  • Late payments have a negative effect on your credit
  • Set up automatic payments to avoid being late
  • Delinquent accounts that are sold to a collection agency are very bad for your credit

Other Ways to Build Credit with Credit Cards

Authorized User

Many credit cards offer the option for the primary cardholder to designate one or more other people as “authorized users.” Depending on the type of account, an authorized user may have full, partial, or no access to the credit limit and account.

The benefit of being an authorized user is that the card activity will be reported on your credit report as if the card were actually yours. If you can’t get a credit card yourself, this option gives you a way to get a revolving account on your credit report.

The same account activity will be reported on the primary cardholder’s credit report and the authorized user’s report. This means all of the positive account history will be there, but it also means that all of the negative activity will be there too.

Authorized users are able to use the credit card as if it were theirs, but they are not legally obligated to pay the bills: only the primary cardholder is.

So think carefully before becoming an authorized user on someone else’s card, or letting someone become an authorized user on your card.

Q&A Video: Can I Build Credit As An Authorized User?


If you have bad credit and aren’t eligible for a particular card, you may be able to get a cosigner with better credit to apply for the card with you. You can then be approved for the card based on your co-signer’s credit, giving you access to better cards than you could usually get.

In a cosigning arrangement, both members are legally obligated to pay the bills. That means if one of the cosigners abuses the card, makes late payments, and goes over the credit limit, both people will feel the effects not only on their credit report, but potentially on their wallets as well.

Cosigning is usually not recommended, especially when it comes to credit cards. Complications can and do arise, especially because people with poor credit and financial habits are those who tend to need a cosigner.

Other Ways to Build Credit

Credit Builder Loans

Credit builder loans are a very different type of loan, usually quite small at around $500 to $1,000. The main feature of credit builder loans is that you don’t actually get the line of credit – instead, that amount is deposited into an interest-bearing account in your name.

You’ll need to pay the loan back fairly quickly, in regular monthly installments, but as long as you make your payments on time you’ll be building up a positive account history on your credit report. Once you’ve fully paid off the loan, you’ll have access to the money plus the interest that was earned.

So credit builder loans are a bit backwards – you need to pay them off first, and then you get the money. They are only meant to help you improve your credit in a safe way, rather than give you immediate cash to make purchases, like a credit card or personal loan.

Insider Tip: Want to use credit builder loans to build up or repair your credit? Check out Self Lender, which offers a free credit score and help getting your credit on track. You’ll get a deposit of $1,100 in an interest-bearing account, and you’ll have 12 months to pay it off. After a year, you’ll have the money plus interest, along with a new positive account on your credit report.

This guide was last updated on July 21st, 2016. If you have more questions, we’d love to hear from you! Use the ASK button in the top right corner of any page of the site.

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