Using a Credit card strategically remains an effective method to build and improve your credit score. A credit card can be a powerful financial tool if managed responsibly, as it provides an opportunity to establish a positive credit history and demonstrate your creditworthiness to potential lenders.
By understanding how credit cards impact your credit score and implementing smart practices, you can navigate the world of credit in a way that sets you on a path towards a healthier and stronger credit profile.
In this guide, we will explore essential tips and best practices on how to use a credit card to build credit in 2023, and build credit history, helping you unlock better financial opportunities and achieve your long-term financial goals.
10 ways on how to use a credit card to build credit
Here are essential tips on how to use a credit card to boost your creditworthiness:
1. Choose the right card
Look for a credit card that suits your financial situation and credit score. If you have a limited credit history or a lower score, consider secured credit cards or credit builder cards designed to help individuals build credit.
2. Make timely payments
Pay your credit card bill on or before the due date every month. Your payment history has a significant impact on your credit score and demonstrates responsible credit management to lenders.
3. Keep low credit card balances
Aim to utilize no more than 30% of your credit card’s limit. High credit card utilization can negatively affect your credit score, so keeping balances low is beneficial.
4. Avoid minimum payments
Whenever possible, pay more than the minimum amount due on your credit card. Paying off the balance in full each month is ideal, but if that’s not possible, aim to pay as much as you can to reduce interest charges and card debt.
5. Don’t max out your credit card
Avoid maxing your agreed credit limit, even if you plan to pay it off soon. High credit utilization can harm your credit score, so keep some available credit to maintain a healthy credit utilization ratio.
6. Keep old accounts open
The length of your credit history contributes to your credit score. Keep older credit card accounts open, even if you don’t use them regularly, as they positively impact the average age of your active credit accounts too.
7. Avoid too many credit applications
Each credit application results in a hard inquiry on your credit report, which can lower your score temporarily. Apply for credit only when necessary to minimize the impact on your credit score.
8. Regularly monitor your credit
Keep track of your credit score and review your credit reports regularly. Monitoring helps you identify errors or fraudulent activities promptly and allows you to take corrective action if needed.
9. Set up payment reminders
Missing a payment can significantly impact your credit score. Set up reminders or use automatic payments to ensure you never miss a due date.
10. Be patient and persistent
Building credit takes time and consistent responsible credit behaviour. Be patient, and with consistent effort, your credit score will improve over time.
How to manage your credit card account?
Managing your credit card account responsibly is essential to maintain a good credit score and avoid unnecessary debt. Here are some valuable tips on how to effectively manage your credit card account:
1. Create a budget
Before using your credit card, establish a monthly budget to track your expenses. Make sure you have a clear understanding of your income and prioritize essential expenses to avoid overspending.
2. Pay the full balance
Whenever possible, pay your credit card balance in full each month. This practice helps you avoid accumulating credit card debt and prevents interest charges. If you can’t pay the full balance, aim to pay more than the minimum to reduce interest costs.
3. Monitor your credit card statements
Regularly review your credit card statements for accuracy and any unauthorized transactions. Promptly report any discrepancies or suspicious activities to your card issuer.
4. Regularly review your credit report
Obtain your credit report from major credit bureaus at least once a year. Review the report for accuracy and address any errors or discrepancies promptly.
5. Keep contact information updated
Ensure your credit card company or issuer has your current contact information, including email and phone number, to receive important notifications and alerts.
Types of credit cards to build your credit score
There are several types of credit cards specifically designed to help individuals build or rebuild their credit scores. These credit cards cater to people with limited credit history, a fair credit score, or even those with a poor credit score. Here are some common types of credit cards that can aid in building your credit score:
1. Secured credit cards
A secured credit card requires a security deposit as collateral, usually equal to the credit limit. The deposit protects the issuer in case you default on payments. A secured card is an excellent option for those with no credit history or a low credit score, as they offer a lower risk to the card issuer.
Responsible use and timely payments can help you build a positive credit and positive payment history too.
2. Credit builder cards
Credit builder cards are specifically designed to help individuals with limited or no credit history build credit.
These cards typically have low credit limits and may come with higher interest rates. They serve as a starting point for establishing a credit history and demonstrating responsible credit behaviour.
3. Authorised user cards
Becoming an authorized user on someone else’s credit card can also help you build credit. If the primary cardholder has a positive credit history, their account activity may reflect on your credit report, potentially boosting your score.
Factors to keep in mind when selecting a credit card for building credit
Around two-thirds of the people in the UK use at least one credit card. If you’re planning to build your credit score with a credit card responsibly, here are some things to consider:
1. Annual fees and interest rates
The first thing you must look for in a credit card is the annual fee and interest rate. It’s not standard across the board, but many credit card providers, from Natwest, American Express, Lloyds, and Barclaycard, have zero annual fees.
2. Rewards programs
Cards with a rewards program are the best way to use a credit card to build credit and save money. There are a few credit card service providers in the UK that offer awesome rewards on your spending. For example, some cards from Barclaycard and American Express provide cashback, discounts, and free subscriptions. Look for these perks while choosing a credit card.
Conclusion
In conclusion, using a credit card strategically in 2023 can be a powerful tool for building and improving your credit score. By following key guidelines and best practices, you can pave the way for a stronger credit profile and enhanced financial opportunities.
Frequently Asked Questions
What are the golden rules of using a credit card?
The golden rules of using a credit card dictate to use your card responsibly. Only spend what you can afford on the next billing date, and keep track of all your spending.
What are the three ways credit cards are useful?
Credit cards can improve your credit score, maintain an emergency reserve of funds, and track your monthly expenditure.
How to use a credit card successfully?
You can set a low limit on spending on your credit card. It allows you only to use it when necessary and prevents unauthorised transactions. It also helps to set up 2-factor authentication and check in with your bank for the latest updates and offers.
What are the five tips for effective credit card use?
To get the best out of your credit card, avoid any unnecessary fees, always pay more than your minimum limit, make your payments on time, keep all your account changes in check and always spend less than your credit limit.
Can I pay my credit card the same day I use it?
Yes, your credit limit decreases as soon as you conduct a transaction on your credit card. However, paying too early won’t have much of an impact on your credit score.
What is the fastest way to build credit with a credit card?
Build credit faster with a credit card by paying your bills on time, keeping your utilisation low, limiting any new credit applications, building a credit history by regularly using your credit card, and boosting your credit limit.
Disclaimer: The information given above is provided for reference only. This is not financial advice. Also, we are not affiliated to or promoting any external parties linked here, they are provided for reference only.
Related guides:
How Do Credit Cards Work in the UK
What Does Your Credit Score Start At
