Credit Cards for Credit Benefits?

TLDR: I write for various financial magazines, and I received these questions for an article Wallet Hub was preparing.

💡 Smart Credit Habits = Wealth-Boosting Power

• Use a credit card monthly, pay in full

• Set up auto-pay for every bill

• Monitor your score (free tools)

• Keep balances low

• Think long-term: Credit score affects real estate, investing, and even careers

  • Example: lower credit scores increase the cost of home ownership by over $200k for the typical home owner…
    
    FOR FUN: Quick video from Google VEO based on the title, crazy good!

Their Questions:

Do you think a credit card is the best credit-building tool available to consumers?
IMO a credit card can be one of the best tools to build credit, if used wisely. It reports activity to the credit bureaus, which helps establish your credit history and score. But it's not the only way. Other tools, such as credit-builder loans, secured cards, and consistent on-time payments for installment loans (like auto or student loans), also help build credit. One of the best ways to use a credit card is to use someone else’s credit card. Consider having a long-term existing cardholder (parent, grandparent, guardian, or close friend) add you as an authorized user, which can help increase your overall score.

What should people look for in a credit card if building credit is their main objective?
Look for a credit card that:

• Reports to all three credit bureaus (Equifax, Experian, and TransUnion)

• Has no annual fee (or a very low one)

• Offers a low credit limit that you can easily manage

• Provides online access to track spending and payments

• Rewards can be a big deal, and reduce your card costs dramatically

A secured credit card is a great option for beginners—it's backed by a deposit, which limits the lender's risk and makes approval easier. We used that with our children to help them build credit before they got their first card, and it’s a great budgeting tool for them to learn to track spending against a set budget (what you load on the card each month).

 What other advice do you have for people looking to build credit?

• Pay your bills on time—always. Payment history is the biggest part of your credit score.

• Keep balances low. Try to use less than 30% of your credit limit.

• Don’t apply for too many accounts too quickly. Every credit check can slightly lower your score.  Credit reporting for new cards is often adverse for 12 months, neutral for 12 months, and then positive thereafter if you’ve paid on time. Build new credit slowly if possible; getting a credit card doesn’t improve your credit. A good payment history improves your credit.

• Keep older accounts open. The longer your history, the better your score. Don’t close cards. Charge something on each card at least once annually and pay in full for maximum benefits.

• Monitor your credit regularly—many free services make this easy.

Why don’t all major credit card companies offer credit cards that are good for building credit from scratch?
Because issuing credit to someone with no history is risky for lenders. Without data to predict repayment behavior, banks may hesitate or charge higher fees. Many companies focus on profitable, established borrowers rather than offering low-limit or secured cards that come with lower returns and more risk management needs. house

The ‘Secret Guide to Credit Scoring’ is a great resource to consider - we use it as a companion handout to our ‘Credit Scoring Workshop’. Here is the stripped-down version you can modify and share with clients.

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