Credit · May 14, 2020

How Credit Cards Can Help When You're Building Credit

A strong credit history can help you get many of the things you want and need—a great interest rate on a car loan, for example, or approval on the lease for your new apartment. But how do you show you're reliable with money and make-on time payments if you're just starting out and don't have much credit history?

To start building credit, you'll first need to show how you handle smaller amounts of debt. Using credit cards to pay for small purchases can be a good first step.


Using credit to build credit

While it's always wise to make sure the debt you take on is within your means, avoiding all types of credit transactions can work against you in the long run. When the time comes to apply for a loan, a thin credit file can make it difficult for lenders to evaluate your ability to handle debt.

By starting small and gradually building credit, you'll have a documented history of on-time payments. Even using your credit card once or twice per month will generate a balance that helps establish a payment history. Paying your credit card bill on time may also allow you to eventually upgrade to credit cards with more perks or lower interest rates.

If you want to avoid paying interest, you can pay off your balance off every month. If you decide not to pay the full balance, you'll have to pay at least a minimum amount stated on your bill. When you carry part of your balance over to the next month, you'll be charged interest on the unpaid amount.

Choosing your first credit card

If you've never used credit cards before, it might be best to start with a fairly basic card. Look for the following features when choosing between offers:

  • Credit limit: A lower spending limit will keep your balance down until you are comfortable using credit. If you want even tighter controls, look to a secured card option where you put up the collateral—usually a deposit of $200 or more.
  • Interest rates: Keep an eye on the interest rates of each card offer you evaluate. Some cards offer low introductory rates, which increase after a set period of time.
  • Fees: Credit card issuers may charge fees for late payments, cash advances and foreign transactions, as well as reward programs. Compare fees between cards and choose one that fits best with how you intend to use it.
  • Digital access: Find out whether you can access your account online or through a mobile app to monitor your spending and payments throughout the month.
  • Fraud protection: Under federal law, customers are only legally liable for $50 on fraudulent charges, but many issuers won't hold customers responsible at all. Most major cards offer zero-liability protection on fraudulent transactions or stolen cards. Review any credit card offer for information about your responsibility to report a lost or stolen card or any suspicious charges on your account.
  • Reward programs: As a first-time cardholder, you may not be eligible for the highest reward level, but pay attention to additional perks and programs that may be offered as you establish your credit.

Secured cards

A secured card is another option for those interested in building credit. This type of credit card requires you to provide an initial deposit that will be held by the issuer while you're building credit. Your credit limit is the amount of this deposit—so if you deposit $500, you'll have a $500 limit on the card. 

Because of this feature, you don't need as strong a credit score to qualify for a secured card. By building a history of on-time payments and responsible management of credit, you'll be able to qualify for better cards. The issuer may even have a structure where, after a period of successful payments, the secured card becomes a conventional, unsecured one.

This makes secured cards potentially a good option for first-time cardholders. Some secured cards offer typical credit card features, but they typically don't have as many rewards or perks as other types of cards.

Using your credit card responsibly

Start building credit in small increments that you can easily track. For instance, you can use your new card for frequent purchases like gas or groceries. This will make it easier to pay off your bill each month and demonstrate you can handle credit responsibly.

Over time, as you become more comfortable using credit, you can increase your spending. As a general rule, most creditors report your balance and payments to the credit bureaus on a monthly basis. The bureaus this information to calculate your overall credit score.

When used properly, credit cards are a relatively easy way to build a positive credit history.

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.