Credit Cards How To Use Credit Cards Wisely

What’s the Best Way to Pay When Trying to Improve Your Credit?

Written by Jason Steele

In today’s economy, it’s extremely important to have the best credit you can. Having a high credit score can help you to receive a lower interest rate on a home mortgage or a car loan, and can even result in more favorable insurance rates. And when you are trying to improve your credit, it’s important to consider what the best method of payment is.

How Different Payment Methods Affect Your Credit

Most forms of payment have no effect on your credit. Clearly, your use of cash or checks will not be reported to any of the major consumer credit bureaus, and it won’t impact your credit history or credit score in any way. It’s also a popular misconception that using a debit or a prepaid card will help your credit. When you use a debit or prepaid card, you aren’t being extended any credit. And since your credit history and credit score are designed to reflect your ability to repay a loan, debit and prepaid cards are not included in it.

However, credit cards require repayment and each purchase is considered to be a loan. Unlike other forms of payment, you will always receive a monthly statement when you use a credit card. And each month that you’ve made purchases or have a balance, you will be required to make a minimum payment on or before the statement’s due date. All of these payments are reported to the three major consumer credit bureaus, and your on-time payments will help your credit history and raise your credit score.

In fact, your payment history is the most important factor is used to make up your FICO credit score, representing 35% of your score. But with no payments to make, your debit or prepaid card will not contribute to your credit score.

For example, you could have a debit card issued by your bank that is linked to your checking account, but nothing about it will be reported to the credit bureaus. There are many prepaid, reloadable cards like the American Express Serve, the NetSpend Visa, and the AccountNow Visa. Even those these cards look like credit cards and are part of payment networks such as American Express and Visa, you must load money on them first, so it is not a loan. And since it is not a loan of any kind, it will not appear on any of your credit reports.

The Potential Dangers of a Credit Card Usage

Although using credit cards can allow you to build a credit history and increase your credit score, there are many potential dangers to their use. The most serious one is debt. Many credit card users will spend more than they would with other forms of payment such as cash or debit cards, since a credit card will allow you to spend more money than you have.

Making unnecessary purchases is also wasteful, and when you fail to pay your entire balance in full, you will incur costly interest charges. As unsecured debt that is never tax deductible, credit card interest charges will be more expensive than student debts, a home mortgage, or a car loan.

Furthermore, carrying a large amount of debt will hurt your credit score. Your debt comprises 30% of your FICO credit score, and is the second highest factor right after your payment history.

Finally, many credit cards offer you rewards for your spending. Although these rewards can be valuable, too many credit card users find themselves overspending in order to earn additional rewards.

How to Safely Use Credit Cards to Help Build Your Credit History

The interesting thing about credit cards is that having an account open and in good standing adds to your credit history, even if you don’t use your cards that often. Your credit history contains all of your credit card accounts, and your payment history for each. Whether you make a single charge each month, or use your credit card for all of your everyday purchases, the report made to the credit bureaus will only list your statement balance and whether you made your monthly payment on-time.

Therefore, there’s an easy way for you to use your credit cards to build credit while avoiding debt and costly interest charges. If you simply use your credit card for a few small transactions each month, and are careful to pay your statement balance in full each month, then you will avoid both debt and interest charges. At the same time, your credit history and credit score will reflect your on-time payments to accounts that are in good standing.

Getting a Credit Card When You Have Little Credit History or Poor Credit

As you try to build your credit, one of the problems you might face is being declined for a standard credit card due to your credit history. Thankfully, there are secured cards that are offered to nearly everyone, regardless of past problems with their credit.

A secured card works much like a standard credit card, except it requires payment of a refundable security deposit before your account can be opened. But once your account is opened, you will have many of the same benefits and responsibilities of any other credit card. For example, you will receive a monthly statement, and you will have to make a payment each month of at least the minimum balance. And if you choose to carry a balance, then you will incur interest charges.

However, secured cards will appear on your credit report just like any other credit card. You will build a good credit history by making your payments on-time and having a very low amount of debt. In addition, secured credit cards can offer valuable benefits such as extended warranty coverage and rental car insurance.

With a perfect record of on-time payments for one year, many secured credit card users find that they are able to qualify for standard, non-secured credit cards. They can then cancel their secured card and have their deposit refunded.

Bottom Line

By understanding how credit cards can help you to build your credit, you can safely use these powerful financial tools to help you achieve the credit you deserve.

Do you have any experience with these payment methods? Tell us below!

About the author

Jason Steele

Jason Steele is a freelance journalist specializing in credit cards and personal finance. His work has appeared in many of the top personal finance sites as well as mainstream outlets such as MSN Money, Yahoo Finance, and Business Insider.


  • I have an issue with the big 3 credit report agencies. I have a 580 score in all three…one of them never moves no matter what. A brand new car…all payments made on time…5 credit cards all paid in full every month to avoid interest. Yet score barely goes up. Looking to trade in my car for another one and all they seem to do is look at the lowest score and not the payment history. Am I doing something wrong??? I make 65k a year…same job for 28 credit limit is 5k on all my cards…which I repeat I pay off in full every month

  • I have a BofA credit card and have a 786/803 credit score and they keep jacking up my interest rate to 17.99%.
    I want a really low interest rate. I would really dig it if i get a lower rate. I called and asked about it and they told me that cannot do anything about it. Then they offered a higher amount of credit. I asked them to take $4000.00 off my credit and give me 10% interest…hehe. They refused that thought.

    • Its extremely hard to remove paid collections. There’s nothing in it for them to remove it.

      Always have them validate the debt first. If they can’t they have to delete. If they can validate, request a pay for delete but get it in writing.

    • FICO is used more widely (much more so) by creditors. So, while the Vantage Score (typically found on the free credit report sites like credit karma) is a good gage, it is not the score used for those looking to grant credit.

  • My credit score is in the 5’s, can’t seem to pull it up. I had an annual income of $47,000 but now it’s $18,000 I don’t know how to get out of debt. I have 5 credit cards all maxed out and 2 department store cards which keep incurring late fees, help!

    • I worked hard to pull my credit score up to 686. I just received a huge drop and when I checked it out, an old utility bill was apparently listed as ‘open’ in the amount of $2040. A collection agency listed the bill. However, I entered into a service with Accredited Debt Relief more than a year ago, and they had established a payment plan with this same utility and the paid them 2 installments, the final one due this month. Can I dispute this and have it deleted? It is erroneous.

    • How did you get approved for 5 unsecured credit cards with such a low credit score? You must be old; in your 40’s 50’s and opened up all those credit cards over the course of years.

  • My credit score was 580. Now after one year of issues due to past I. D theft I’ve ended up with a score of 810. Then unfortunately A certain cable company dove into my credit bureau not once but twice two days a part. which I’m aware they are not suppose to do this. Hence hurting
    My score down to 800. credit solutions has helped me beyond I ever could imagine. I’m one happy lady. Thank you again and again !!

  • I had a credit score of 530. Bad marriage was to blame. I couldn’t get credit to save my life. So I did go the secured way and deposited $200. With a 100% on time payments, I started getting letters for pre qualified unsecured credit cards. A year and a half later, I now have 5 credit cards with 100% on time payments. Credit score is now at 733! I would have never believed it, but it’s true. So, my advice to people wanting to REALLY improve their credit score is to listen to the advice of these experts. Thanks again!

  • Bank Debit or Credit? When I use my debit card I usually select credit b/c I don’t like typing my pin at certain places. Is this being reported as a credit card usage, even though its coming directly out of my account?

  • Ever time I have had credit card my credit score has badly dropped. They make it very hard to get out of debt because the interest added on. But my score does slowly goes up without them. I don’t what to be in debt just to have good score. There has to be another way.

  • I read your information all the time, but I’m hesitant to use more credit cards even to consolidate to pay off existing debt. I worry about the “hard inquiries,” the monthly bill and whether or not the monthly expenditure would actually decrease as needed or increase. I thought if shopping for best rates was done for the same purchase, the hard inquiry would show as one incident, such as car shopping. But I see multiple hard inquiries listed for our recent auto purchase on Credit Karma. I don’t want to repeat that with cards. Please advise further.

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