How Credit Cards Help Build Credit
Building credit can be challenging, especially if you are new to credit. One proven way to boost your credit ranking
is to use credit cards wisely.
Credit card accounts are what are known as revolving credit, since the credit card issuer
will establish a credit limit for you and you can use your own judgment about how much to spend on your credit cards, up to
your pre-determined limit. Because a fairly large portion of your credit ranking is determined by your use of revolving
credit, it is essential that you know how to use credit cards to help build your credit. If you are trying to establish
yourself as a creditworthy borrower, or if you have bad credit and wish to rebuild your credit, then credit cards can help.
Types of Credit Cards
There are basically two types of credit cards: secured and unsecured. Which type that you choose will be based on whether
or not you qualify for the card, and whether or not you accept the terms and conditions of the card, including its interest
rate! Secured credit cards are often recommended for building credit for those who cannot qualify for credit due to having
no credit history or bad credit history. The secured credit card is a credit card account that is (as the name implies)
secured by your deposit into the bank that issues that card. The deposit is held in a savings account, or sometimes as a
CD (certificate of deposit), depending on the issuing bank. The amount of your deposit will vary. Some cards have a
minimum of a few hundred dollars, others may ask for more. Your credit limit will be determined by the amount of your
deposit. You may be given a credit limit that is equal to the amount of your deposit or that is twice the amount of your
deposit, depending on the card that you choose and your individual credit score, among other factors. Once a period of
time has passed and you have shown the credit card issuer that you are a good steward of your available credit, you may be
offered an unsecured credit card account.
Unsecured credit cards are those that don’t require you to post a deposit in order to open up an account. This is a “regular”
credit card. In most instances, you need fairly good to excellent credit to be approved for a regular, unsecured credit card.
That is not always the case, however, since there are a number of credit cards that are made specifically for those with bad credit
or no credit. Those cards can be very expensive to hold, however, with many of them featuring an interest rate greater than twenty
percent. Nonetheless, you can use these cards effectively to build credit, although it will cost you more over all.
The Formula for Building Credit Score Points
When you are using credit cards to build your credit score, the key is in making timely payments and in not running a high balance.
By making payments on time, you prove to the bank issuing the credit card that you are capable of managing your credit. Be sure to
send your payment in early each month so that it has time to be processed on your account, since it can take a few days for that to
happen (and just one late payment can negatively impact your credit ranking). For the maximum number of points to be added to your
credit score, do not run a high balance. You should charge no more than one-half of your available credit during any one month, and
pay your balance down to the point where you have one-third of the credit limit used up each month. This method has been shown to add
valuable points to your credit score, quickly!
Updated: January, 10 2012