Credit cards play a crucial role in determining your credit score. Getting the right credit card and ensuring regular usage with maximum care is an effective and quick way to build your credit. 

While building a good credit may seem intimidating, all you have to do is, give it some time and inculcate smart habits. Always start small but smart when it comes to building credit. In this article, we guide you on some of the ways in which you can use your credit card to build your credit score. 

1.  Pay the Bill On-time and in Full

Your credit score is a numerical indicator of how you manage debt. It determines your creditworthiness and your responsibility in handling credit. In simple terms, it focuses on how one borrows money and repays it. For good credit, it is important to ensure on-time payments for all kinds of debt. 

If you have never borrowed before, your credit score may be low because you have no credit history. If you have not borrowed any debt such as a personal loan, making regular expenses with a credit card and repaying it on time will help you build your credit history. 

Make sure to completely pay off any pending credit card bill every month and on time. The card issuer reports your timely payments to the credit agencies. By making payment in full, you can also avoid the burden of interest payments. 

An individual’s payment history easily makes up to 35% of the credit score. Regular usage of a credit card, and settling bills on time and in full, is the first step to build your credit score using your credit card. 

2. Use your Credit Card like a Debit Card

While using credit cards, you may not realise the impact of making purchases because your bank account doesn’t get used and the balance in it remains intact. Only while making the credit card bill payments, you may realise how much money has to be withdrawn from your bank account. Hence, if you are not cautious, you can easily overspend and regret later.

It's important to maintain a budget, irrespective of whether you’re using a credit card or a debit card. This way, you will have control of your spending and know the available balance in your bank account. 

Treating your credit card as if it were a debit card can help because you will spend only as much as you can afford. The more attention you pay towards your spending the easier it is to settle the bills and avoid paying interests on your purchases. 

3. Maintain a Low Credit Utilisation Ratio

The credit utilisation ratio plays a crucial factor in determining your credit score. This accounts for nearly 30% of your credit score and therefore it is considered the second most important factor. 

While you have to consider the total amount you owe, credit scores also focus on your credit utilization. Credit utilization is the percentage you owe out of the total available credit. The more your utilization, the higher the chances that you have over-borrowed and might miss payments. This is why we recommend having a low credit card balance. Always try and aim for 30% or lesser.

There are chances that you have high utilization despite paying off the credit card bills on time and in full every month. Credit card issuers always report the balance on the monthly statement to the credit bureaus. Therefore, to try and keep a low utilization, pay the bill twice a month instead of waiting for the final bill to arrive at the end of the month.

4. Keep your Old Credit Card Accounts Active

Lenders always gauge your credibility with the timeline you use credit for. The thumb rule is that the sooner you own and use a credit card responsibly, the higher your chances of building good credit. Always make sure to keep your old credit card accounts active. 

Owning and using credit cards for sign-up bonuses and then eventually closing them may not prove to be helpful. Instead, try to shuffle between cards, search for a card that meets your expectations and retain it. 

Each time you open a fresh credit account or get rid of an old one, the average age of the accounts is reduced and this can impact your credit score. One’s credit history mainly in terms of the length of the accounts comprises 15% of credit score.

5. Say No to Many Credit Cards

It is always tempting to hunt for multiple credit cards, especially with the kind of rewards and bonuses on offer. While this is perfectly fine, opening up multiple credit card accounts could mean trouble especially when you set no limit on the number of cards. Furthermore, managing a lot of cards at once could mean a lot of hassle. 

If a credit card tempts you into buying more than your bank balance can afford, or if you are having trouble in remembering the due payments, it makes sense to not open them. These will hurt your credit score instead of helping it. Also remember that each time you get a new card, your report will show an enquiry against your name and this can have a negative impact on your credit score.

6. Get a Secured Credit Card

For individuals who are struggling with bad credit, one solution is to go for a secured credit card. Opening a credit card against a fixed deposit is one of the popular ways to get a secured credit card. When you open a secured credit card, the credit limit is around 80 - 90% of the fixed deposit amount. 

A secured credit card which is managed well can help one’s credit score in all regards. For example, if all your payments are made on time, you can easily establish a good track record of consistent and positive payments. If you can keep the credit card account open for long, you can easily have a lengthy credit history. 

Once you have reached a good score to get approvals for better cards, you can open an unsecured card with a bigger limit. 

7. Evaluate the Available Options & Choose the Right Card

If you are new to credit or have had bad experiences in the past, you may not get the best available offers easily. The best cards are offered to individuals with good or exceptional credit. You may focus on credit cards which are designed for individuals with poor credit or average credit. While the rewards and perks may not be as exciting as the top-end cards, these can be a good starting point and can help you take a step towards building good credit.

Remember that each time you apply for a fresh credit card, the card issuer goes through your credit. These verifications can easily knock a few points off your credit score. Multiple credit card requests within a short period can also hurt your credit score since it can indicate financial trouble.

8. Maintain an Emergency Fund

Falling into a credit card debt trap is easy especially when you’re tempted to spend big. Some credit card users find it difficult to settle the outstanding balance, as emergencies continue to pop up and new expenses keep piling up on the credit card. Such usage can mean trouble for your credit card balance as it starts to swell. The utilization ratio can get worse and it means a lower credit score.

The ideal way to break this cycle is to maintain a separate emergency fund. This way, you can continue to use your credit card for emergency costs but you can make the bill payments on time and in full and not get trapped in the debt cycle.

The Bottom Line

Credit cards are a great way to build your credit score, especially when you use them smartly. If you wish to build good credit, make use of credit cards while continuing to make payments on time. Making use of a small portion of the credit card's limit can further help in building your credit score. 

however, note that building credit with the help of a credit card can be a double-edged sword. If you use it well, it can work wonders for your credit and ensure a positive credit score in the future. But if you are not able to manage your card and be responsible with your payments, it can impact your credit score significantly. 

Use the tips listed here to build your credit score and manage your credit card payments easily.