How to use credit cards to improve your credit score

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Credit cards can offer an important way to build good credit.

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Credit cards often present a cautionary tale about what not to do with your money. However, when used wisely, credit cards can offer one of the fastest and easiest ways to build and improve your credit score.

Counterintuitive? Not really. Demonstrating to creditors that you can manage a debt load sends a signal that you can … well … handle a debt load. Here’s how to improve your credit score with a credit card.

Your credit score is based on information listed in your credit report. Your credit report is a history of the debt you have or can access, including your open credit cards. All of that information is assigned numeric values and crunched using a complicated mathematical formula. The three-digit number that results is your credit score.

Credit cards are uniquely suited to improve your credit score because of how your FICO score, the most-used credit scoring model, evaluates various behaviors.

Payment history. This accounts for 35% of your score and includes your on-time payments. Most credit card payments are reported monthly. Just making a minimum payment on time each month can help your score.

Credit utilization. This is how much of your available credit you’re using, expressed as a percentage. If you have a $1,000 limit and you have $200 on your card, your credit utilization is 20%. If you have more than one card, add up all the credit limits and outstanding balances, and calculate the aggregate percentage. This factor accounts for 30% of your credit score.

The lower your credit utilization, the better. A good guideline is to try to keep your credit utilization below 30%, but it’s even better to just pay off your balance each month.

Length of credit history. Worth 15% of your score, this is a measure of how long you’ve had the account. A long-standing credit card can be a big help. Canceling a credit card you’ve had for a long time (even if you don’t use it very often) can actually lower your credit score by changing your credit utilization and thus reducing the overall length of your credit history.

Credit mix. About 10% of your score reflects the different types of credit you have:

Having a credit card provides you with the second type of credit in the mix, which can have a positive impact on your credit score.

New credit. Be careful with new credit, because it accounts for 10% of your credit score. If you open too many credit cards in a short period of time, it can lower your credit score slightly. The good news is that if you have one or two credit cards and use them carefully, you can quickly overcome the new credit setback.

Now that you know how a credit card can impact your credit score, it’s time to put the principles into practice. Here’s how to improve (or build) your credit score with a credit card.

Step 1: Open a credit card account.

Review your credit card options. In some cases, if you have poor credit or no credit, you might need to use a secured credit card.

Make sure you’re getting a credit account and not a debit account. Most debit card accounts don’t report to the credit bureaus, so they won’t impact your credit score.

Step 2: Use your credit card.

For best results, you need to use your credit card if you’re trying to improve or build your credit score:

Step 3: Make your credit card payments.

Be sure to pay your credit card bill on time and make at least the minimum payment. A positive payment event reported each month quickly builds a good history.

But pay off your balance if possible. When you carry a balance from month to month, you can end up with hefty interest charges. Plus, a habitually high credit utilization can drag on your credit score. For best results, you want regular utilization but not ongoing debt.

Step 4: Keep your credit card.

Even if you get another credit card later, try to avoid canceling your old card. Use it for at least one or two purchases every month and pay it off. The longer you have a credit card account, the better it will look for your overall credit history. Plus, you can keep the credit utilization favorable and have multiple accounts with positive payment histories.

Even if your credit score took a hit due to past mistakes or circumstances outside your control, a credit card can be one way to help you recover. Those with no credit can benefit from starting with a basic credit card as well. The key is to avoid spending more than your budget. Keep track of your expenses and avoid getting into debt. As long as you can pay off your balance each month, you should be able to improve your credit score with a credit card.