The Simple Two-step Process

Credit cards can be one of the fastest ways of building a strong credit score by doing two simple things:

  1. Make one small purchase each month using the card.
  2. Pay the balance in full each month.

What card should I use?

It’s best to start with a card that currently has a $0 balance. A couple of good options are 1) a new card (especially for people who have less than three cards currently), or 2) an existing card that you have paid off the balance and don’t use regularly.

Can I build my credit with a secured credit card?

You can build your credit score with secured cards as well. Just make sure that the card you choose reports to all three major credit bureaus. These cards require you to secure your account with a deposit equal to or slightly less than the credit limit. Be aware that these cards often have higher fees.

Here’s how to build credit with a credit card using the double auto-pay process

A good way to build a history of on-time payments with a credit card is do use the double auto-pay process. Here’s how it works:

  1. Find a small recurring bill that is always the same price (think Netflix or Dollar Shave Club).
  2. Setup this recurring bill for automatic payments using your credit card.
  3. Set your credit card to have automatic payments made using your bank account.
  4. Avoid using the card for anything else so the payment doesn’t change. Consistency is good for your credit score. Predictability is also good for your budget.

How'd they do that?

See how others improved their credit score.

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How can opening a new credit card improve my credit?

If you were to open a brand-new credit card account and use it for the double auto-pay process mentioned above, it can help you improve your credit in three ways.

Payment history

First, you build payment history. The more on-time payments you have, the better your credit will be. This simple process adds one payment a month for doing something you were going to do anyway. With the double auto-pay process, you get the on-time payment history without doing any work.

Utilization

Using this process, your utilization rate on the card will be very low. Even if the card you’re using only has a $200 limit, your monthly charge should be less than $20 – this is a 10% utilization rate, which is great, because the lower your utilization the better. If you have other cards with a higher utilization, this low utilization card can help to reduce your overall rate.

Credit Age

Over time it will build your credit age. A smaller factor in your credit score is the age of your accounts. Start now and – with every month your credit age will grow. Over time, this builds up your score. If you already have a card that you’ve recently paid off, this is a good way to keep it open and keep your long payment history growing.

This will take a little time though. It is important to note that when you open a new credit account, you can expect your credit score to drop slightly in the short term. The negative impact won’t last long, though. You should start to see improvements in your score within 6 months, though it could take longer.

Road to results

See how others improved their credit score.

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Some questions you might have:

Can I use this credit card for something else?

You could, but you should not. The sole purpose of this card is to build your credit. Your goals are 1) low utilization, 2) consistent and on-time payment history, and 3) to demonstrate to future creditors reviewing your credit that you can use credit responsibly.

How long should I do this?

Forever! The longer you keep doing this, the more helpful it will be to your credit. Great credit reports (and credit scores) are those that have accounts in good standing and have been for years. If you’re brand new to credit, or just coming out of a bankruptcy, this can start having a positive impact on your score in 6 months!

Can I only do this with only one card?

No. In fact, you should do it with multiple cards. Three is a good number. This builds a really nice credit depth and can drive down your overall utilization rate, bumping your score even higher! If you already have credit cards that you’ve recently paid off, you can convert them to this strategy rather than closing them. Generally, you don’t need more than three cards if you are trying to build your credit. Four or more cards just doesn’t contribute much and could become challenging to manage.

Should I do this with one of my retail cards (a card used at a particular store)?

It’s not recommended unless you need to purchase something from that retailer every month. You should not make purchases you don’t need just for the purpose of building your credit.

I don’t have any recurring bills for the double auto-pay method, what should I do?

It requires a little more work on your part, but all you have to do is make one purchase each month. Just one, that’s it! Then pay the statement balance in full, on-time, every month. You can still use automatic payments to make sure you don’t forget the payment. Remember, the purchase doesn’t need to be big — a gallon of milk, a cup of coffee — anything small that you know you can easily cover in your bank account with the autopay process. It also works to make the card your “gas card.” Use it for something consistent, but with built-in limits on how much you would spend with it.

Someone told me I needed to carry a balance on my credit card to improve my credit, is that true?

Absolutely not! What you need to do is make a payment every month to help your credit. That’s why you should have one charge each month. If you never carry a balance, you should never pay interest. Most credit cards report your statement balance to the credit bureaus each month, usually on the statement date. Most give you 15 to 25 days to pay that balance. If you pay within that window, there is typically no interest charged. By charging an item and paying the balance when you receive the bill, you are using the card exactly how it is intended to be used. The small balance and successful payment will be reported each month to the credit bureau, but you will not pay any interest.

What should I look for in a credit card for this purpose?

There are a few things you should look for:

  1. The card does not charge interest as long as balance is paid in full each month.
  2. The credit card issuer reports to all three major credit reporting agencies.
  3. If possible, also look for a card with no annual fees or other charges.

You don’t need to worry about rewards, bonuses, interest rates, or anything else as long as you are using the card exactly as described here. The interest rate doesn’t matter — because you’ll never pay interest if you stick to this plan. The card holder rewards won’t help you much either, as you won’t be using this card for enough to accumulate meaningful rewards. Your credit score improvement is your reward here. Don’t be fooled by offers that will cost you in the long run. You want no fees. That’s what matters: building your credit, the free and easy way.

You should also make sure there is no fraud liability with the card, which is standard with most cards. It’s always good to have this protection just in case someone steals the card and uses it.

What the data says

Looking at 1,000,000 anonymous credit files sourced from TransUnion LLC (TransUnion®) to see the impact of credit cards on a credit score, we examined the percent of people with prime credit, defined as VantageScore 3.0 of at least 700, based on two factors in the credit report: the number of credit cards and the credit card utilization above or below 50%. It’s clear, more than 80% of people with a credit card and total utilization below 50% have a credit score above 700!

This graph show the relationship between the number of credit cards open and having a prime credit score
The relationship between credit scores and credit card utilization.