4 Secrets to Using a Credit Card to Build Credit

These four tips could make all the difference in whether your credit card improves your credit score.

Credit cards are helpful tools when it comes to building credit. Developing a solid credit record in order to earn a good credit score requires you to borrow, and credit cards can be one of the easiest and most effective ways to do that.

But if you are using credit cards to help you boost your credit score, you need to make sure you use those cards wisely. In particular, here are four tips to help you make sure your credit cards help, rather than hurt, your credit-building efforts. 

1. Don't open too many credit cards at once

If you are working to build a solid credit record and earn a good score, it's good to have a mix of different kinds of loans on your credit history. But while you'll ideally want a few credit cards as well as other types of debt such as a car loan, personal loan, or mortgage, you don't want to apply for too many cards at one time.

Each time you apply for a credit card, you get something called an inquiry on your credit record. This occurs when the card issuer checks your credit report. Each new inquiry stays on your record for a period of two years. 

Unfortunately, if you have many inquiries on your report in a short time, this can be a cause for concern because it may make future lenders believe you are going on a borrowing spree and taking on too many financial obligations. You don't want to drop your score by applying for tons of cards at once, so be patient with adding new cards to your wallet. 

2. Avoid carrying too large of a balance  

Your credit utilization ratio is another important factor that determines your credit score. Utilization ratio refers to the amount of your available credit you use. You can figure out your credit utilization ratio by dividing the amount of money you owe by the total amount of credit extended to you by your card issuers. For example, if you owe $500 and have a $1,000 line of credit, you would have a 50% utilization ratio ($500/$1,000). 

If you don't use much of your available credit, lenders will consider you to be a more responsible borrower. As a result, a lower utilization ratio helps boost your score. If you max out your cards, though, this can raise red flags. A utilization ratio above 30% will typically hurt your credit score, so you should definitely aim not to use more than this amount of the credit extended to you.

3. Pay your cards on time

Paying your cards on time is crucial if you want to use credit cards to build credit. Your record of payments is reported to the credit bureaus, and payment history is the most important factor in determining what your credit score will be. If you pay more than 30 days late, it will do serious damage to your credit record and can lower your score considerably. 

4. Don't close old credit cards

If you have old credit card accounts open, you will want to keep those accounts active. That's because the average age of your credit is a key factor in determining your credit score. The longer your credit history is, the better your score will be and closing down old accounts lowers the average age of your score. 

If you close old cards down, this can also have an adverse impact on your credit utilization ratio. If you have two accounts open with a $1,000 credit limit on each and you've charged $500 on one card and nothing on an old card that you don't use much, your credit utilization ratio will be 25% ($500/$2,000). But closing that old account and losing access to that line of credit would push your ratio to 50% and hurt your score. 

By making sure you follow these four tips, you can maximize the chances your credit cards help you build a great credit score over time. This can make a big difference in many aspects of your financial life.