How Credit Cards Help You Build a Credit History

Credit cards are, no doubt, convenient.

Instead of carrying around cash, you are able to carry around only a small plastic card, and swipe it with ease when you are ready to pay.

However, credit cards are more than just convenient; they also provide a way for you to help establish your financial reputation.

Using a credit card is one of the fastest and easiest ways to build your credit history.

What is Your Credit History?

Your credit history is a record of the way you use borrowed money.

In order to establish that you have certain behaviors, you need to use credit.  Your credit history is used (fair or not) as a gauge of your financial health and your level of financial responsibility.  If you show that you can handle credit, making payments on time and in full, and not maxing out your available credit, you will be more likely to receive preferred treatment when you borrow to buy a car or a home.

A credit history, or credit report, contains the basics of your credit transactions.  Your payment history (how often you are late with payments), how much you owe, and other information is shared, and the data can then be used to boil your history down to a three-digit credit score.  One glance at your score can be indicative, to lenders and even other financial service providers, of your financial habits.

The better your credit history and score, the lower your interest rates on loans, and the more money you save in interest charges.

How a Credit Card Affects Your History

credit card and credit history

Use a credit card wisely and you can quickly build your credit history.

A credit card is very influential in terms of your credit history because it provides regular reporting opportunities.

Each month, a credit card issuer will report whether or not you paid on time, and how much of your credit line has been used up.

These are the most important factors in figuring your credit score.

If you pay on time each month, then it has a positive effect, raising your score.  It also helps if you utilize 30% or less of your line of credit (for example, if you have a $1,000 credit line you use no more than $300).

One of the best ways to quickly build a credit history is to open a credit card account, and then use it regularly.

Use your credit card to make purchases, and then pay off the balance, each month, and you will see an improvement in your credit score.

Because of the frequency of the reports to the credit bureaus, credit cards are tools for establishing your credit habits quickly and easily.  It usually only takes a few months of smart credit card use to see an improvement in your credit score.

The downside, of course, is that irresponsible use can quickly sink your credit score.

If you miss payments, or max out your credit cards, your credit score can be negatively impacted, dropping quickly.

Each missed payment is recorded, and remains on your report for as many as three to five years.  Correcting your habits, and paying on time, can overwhelm the missed payments, but it’s better to start out using your credit card responsibly, only making purchases you can afford and paying off the balance regularly.



Published or updated August 9, 2012.

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