How to Correctly Build Credit with a Credit Card

Building credit with a credit card sounds like common sense, right? Get approved for a credit card, use it, then pay off the balance on time and never allow it to over your limit. Sounds simple, but it really isn’t. Many lack the self-discipline that it takes to actually do something like that. Instead of trying to find out how one could learn this kind of discipline, they just use their instincts, which usually ends poorly. There’s a better way to do this. Even if you don’t have much self-discipline, here are a few tips that will help you in the long run.

Do Some Research

Applying for credit cards is nothing like applying for college, so why use the same strategy? You shouldn’t try to apply to as many as you can and hope it will have a shotgun effect. The same goes for a mortgage or private loans (student or personal). If you have more than two hard inquiries, you run the risk of lowering your credit score. Not only that, but you also find yourself having a hard time rebuilding it because it takes a couple of years for it to drop off of your credit report. They say that hard inquiries have low impact on your credit score. But in my experience, a low credit score cannot afford to have any impact.

To get around this mess, especially when you’re trying to build credit, is to do a little research and find out not only what kind of credit card you would like to have but also what you can qualify for. While doing this, it is extremely important that you do not get prideful and apply for a card you and the card issuer both know will land you a rejection. This means that if you have bad credit and are only able to get a secured credit card, which requires a deposit, then you have to deal with the situation at hand. You’ve made your bed. Now you have to sleep in it. Don’t worry, you will wake up and you will have another chance to make it the way you like. After all, it’s better than not being able to build your credit, right?

Utilize Your Credit Wisely

Do not, I repeat, do not carry a balance anywhere near your credit limit unless you have to. Who am I to tell you what to do, right? Well, I am someone who can tell you that credit card companies are ridiculous in how they judge you. All of the credit experts will tell you that you should do your best to utilize no more than 30 percent of your credit limit. According to Credit Karma, utilizing 30 percent is only fair. A good rating is 10 to 29 percent and an excellent rating is considered to between 0 and 9 percent. This can be very frustrating. Especially if you were approved for a small $100 or $200 limit.

But let’s think about that for a moment. You can pay it off as early as you want. So if you were only approved for a $200 credit limit, you should only spend $60 at a time and then pay it off. Remember, you need to wait for that balance to be cleared. I agree, it is completely ridiculous. But maybe it won’t seem so ridiculous once you notice your credit score soaring over a year. Credit utilization has high impact on your credit score. Some people who have done this have even reported credit limit increases in much less than one year of doing this. To find out what 30 percent of your credit limit is, multiply your credit limit by 0.3. This is your personal credit utilization limit that you should always pay off before you get to.

30% Credit Utilization Shortlist

  • $200 credit limit = $60 credit utilization limit
  • $500 credit limit = $150 credit utilization limit
  • $1,000 credit limit = $300 credit utilization limit

Look at Store Credit Cards

If your credit score is below 700, you need to build your credit. Heck, if it’s even below 750, you should work on your credit and make sure that you can get yourself into an “Excellent” rating. But you don’t necessarily need too much above a 600 to qualify for a store credit card. Yes, it isn’t ideal to have a credit card you can only use at one store. But keep in mind that you can not only get them easily (compared to regular credit cards), it also helps build your credit.

It sucks to have your cashier ask you if you want to apply for a credit card. But do some serious research on these. If you frequently shop at the GAP, JC Penney, or even Walmart and you qualify for a store credit card, then give it some serious consideration. In case you’ve made this far in this section and missed something, the kind of store credit card that I am talking about is not the kind with a Visa or MasterCard symbol on it. It’s the kind that you can only use at one company.

There is just one warning I will give about these store cards: You need to include them in your budget. I cannot tell you how many people got angry because a store credit card closed itself after any period of time between 90 to 120 days. That’s right, three or four months. You know what the reason was? Inactivity. Of course, this isn’t some rule. My GAP card closed itself after a while longer than that. My report says about two years later, but I could’ve sworn it was much earlier than that.

Bottom line: Make room for something from the store you get a card at. So if you shop at JC Penney, treat yourself to one Sephora item each month. It’s really that simple. How about a Walmart card? Again, just buy a couple things on that card and then pay it off. No matter the card, remember to utilize it wisely.

Should You Have Multiple Credit Cards?

If you’ve taken calculus, then you know that you have to forget everything you learned in algebra to really understand it. The same goes with the preconceived notion that multiple credit cards hurt your credit. It’s true that too many hard inquiries can hurt, but they won’t necessarily hurt as much if you are actually approved for the card or loan. Companies will look at that and think to themselves, “Well, they’ve given them a chance. Maybe we could, too.” This is not something that I would recommend unless you’ve got a credit rating of “Fair” or “Good.” This is usually a score between 640 and 750.

It can actually help to have multiple credit cards. According to Credit Karma, having 11 accounts (open/closed) is considered good. Of course, it’s always better to have accounts that are open for a long time. Some creditors consider five to six years to be fair. But they consider seven to eight years to be good. Another reason why multiple credit cards can help you is because it helps keep your credit card utilization low. If you have three credit cards with a total available credit of $2,000, then you can utilize $600.

That being said, it’s also important to not do this as soon as your credit falls in that range. For a little perspective, imagine that someone is asking you out on a date. If that person just got out of a serious relationship, you don’t want to be that rebound where they only want you because they’re desperate. Credit card companies will feel the same way, believe it or not. Just give it some time before going on a credit card escapade.

Building Credit Takes Time

Anything good or worth doing will take some time. Learning how to drive, getting married to the love of your life, earning a college degree, and building credit all have this in common. You should take the time to research each and every card you apply for and you should have the confidence that you will be approved for each card. Once you get the card, do your best to not apply for others for at least one year. Yes, it’s a long time. But again, you need to give it time. Building credit takes months, but your report takes years to rebuild itself.

This is why everyone says it’s important to never carry a balance, even for 30 days, unless it’s absolutely needed. When your credit card company reports to the creditors, it tells them how long it’s been. No time of missed payments is created equal. There are reported levels of 30 days, 60 days, and 90 days. There’s even 120 days, but hopefully you won’t have to worry about that after reading this, if you’ve read this in time. This is why we need to utilize wisely and pay off before the due date. Lastly, if you must go beyond the due date, always pay within 30 days past (the late fee is usually enough).

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