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Credit Cards and Building a Strong Credit History: What You Need to Know

Your credit history can have a notable impact on your financial prospects. After all, your credit history is used to calculate your credit score. With a high credit score, you can qualify for loans, credit cards, mortgages, and other forms of financing with lower interest rates. It may also help you get approved for rental properties, certain jobs, and more affordable insurance premiums. 

Since having a high credit score has so many benefits, you may be wondering how you can increase yours. 

Below, we’ll break down credit scores, credit history, and how to boost yours with responsible credit card use.

Understanding Credit Scores

A credit score is a number between 300 and 850 that provides an overview of your creditworthiness, or your ability to responsibly manage and repay debt. In the United States, FICO and VantageScore are the two most common credit scoring models used by lenders. A “good” FICO score is any score above 670, while a “good” VantageScore is 661 or above.

FICO and VantageScore calculate your credit score using the information contained within your credit reports. They consider the following factors during their calculations:

  • Payment history looks at how often you make your credit payments on time. If you have any late payments, defaults, or bankruptcies on your credit reports, it can negatively affect your payment history.

  • Credit utilization is the percentage of your credit limit that you’re currently using. For example, if you have a credit limit of $1,000 and a credit card balance of $250, your credit utilization would be 25%. Maintaining a low credit utilization (under 30%) can improve your credit score.

  • Length of credit history is the amount of time you’ve had your open credit accounts. The longer your length of credit history, the better.

  • Credit mix shows the variation of credit accounts you’ve used in the past. Having a mix of revolving credit accounts (credit cards, lines of credit, etc.) and installment credit accounts (student loans, auto loans, personal loans, etc.) can give lenders more confidence in your credit management skills.

  • New credit inquiries are listed on your credit reports any time you apply for new credit accounts. Applying for new credit accounts recently or frequently can bring down your credit score temporarily since it suggests that you may be in an unstable financial position.

If you’ve never opened a credit account before, you may not have any credit history yet. It takes one month of credit activity to generate a VantageScore and six months to generate a FICO credit score.

Using Credit Cards to Build Credit

An easy way to start building credit is to apply for a credit card. You can apply for credit cards from traditional banks, online lenders, and credit unions. Credit unions’ credit cards often have lower interest rates and fees. If you have a low credit score or no credit history, credit unions may also be more likely to approve your application than other types of lenders. 

Once you have a credit card, you need to manage it properly so you can generate a positive credit history. Here are some ways to do just that:

  • Make all of your payments on time – Payment history makes up 35% of your FICO score and 40% of your VantageScore, making it the most important credit scoring factor. As such, you want to make sure that you never miss a payment. You can make all of your payments on time with ease by setting up automatic payments.

  • Keep your credit card balances low – Credit utilization is the second most important credit scoring factor. To optimize it, all you need to do is keep your credit card balances under 30% of your total credit limit. An easy way to maintain a low credit utilization is to use your credit card to pay for one monthly subscription service and nothing else, then pay the full balance each month.

  • Keep old credit cards open for as long as you can – When you close a credit card, it’s no longer factored into your “length of credit history.” In turn, closing a credit card account can decrease your credit score. By keeping old credit card accounts open instead, you can maximize your length of credit history and boost your credit score. Following this tip is more affordable if you take out credit cards with low to no annual fees. Credit cards from credit unions often have lower fees across the board.

  • Employ credit monitoring – If you fall victim to identity theft, your credit card could be used without your consent. Credit card fraud is one of the most common types of fraud carried out in the United States. You can catch this type of fraud early on and prevent it from damaging your credit score with the help of credit monitoring. As soon as you receive a suspicious transaction alert, notify your credit card company right away. 

Handling Credit Card Debt

If you don’t pay off your entire credit card balance at the end of each month, your debt can start incurring interest. As of February 2024, the average interest rate for credit cards is 22.63% according to the Federal Reserve. Costly interest can cause your outstanding credit card balance to snowball over time.

Many people are reluctant to use credit cards for this reason. Fortunately, you can prevent expensive credit card debt by paying off your entire balance every month. 

If you already have a large amount of credit card debt, you can pay it down by:

  • Reducing your monthly spending
  • Using the extra money in your budget to make larger credit card payments
  • Following the snowball method or avalanche method
  • Exploring your debt consolidation options

Beyond Credit Cards: Other Ways to Build Credit

Credit cards aren’t the only tools you can use to build credit. You can also earn a high credit score by taking out other types of credit, such as:

  • Personal loans
  • Auto loans
  • Student loans
  • Mortgages
  • Home equity loans
  • Home equity lines of credit
  • Credit-builder loans

No matter what type of financing you use to build credit, credit unions often have the most lenient eligibility requirements, best rates, and most flexible repayment plans.

How to Maintain a Strong Credit History

Once you establish a strong credit history, you want to maintain it long-term. You can do so by keeping up with the responsible credit management habits you used to earn your high credit score in the first place.

If you need additional support, reach out to your local credit union. Most credit unions provide free financial education to their members.

Build a Strong Credit History With CUSelect

Credit cards can help you establish a strong credit history and reap the financial rewards of having a high credit score. By applying for a credit card from a credit union, you can also enjoy lower interest rates, more flexible payment options, and outstanding customer service.

Ready to find a credit union near you? Leverage CUSelect today and start building a strong credit history.