Building credit can be an important step in your financial life, whether you’re buying your first home or preparing to go to college. A good credit score shall help you save money on insurance premiums and make it easier to get approved for loans and credit cards in the future. But what does it mean to build credit? And how do you proceed with building it?

Maintain a Low Utilization Rate

Utilization rate is how much of your available credit you are using. For example, if you have $10,000 in available credit across all of your accounts and only use $1,000 (this would be a 10% utilization rate). Lenders will see this as having a very good payment history. So if you have $10,000 in available credit and spend all of it (100% utilization rate), then they will consider you less trustworthy.

Ask a Friend Or Family Member to Add You As an Authorized User

As explained by experts at Lantern by SoFi, many credit card companies allow you to add friends or family members as authorized users to your account. When you do, they can make purchases using your credit limit. Institutions will report them on their credit scores. They are also responsible for making payments each month.

Pay Your Bill on Time

Pay your bills on time. While you don’t have a bill when you first get your card, it’s important to remember that payments are due at least once every month. If you don’t pay at least your minimum balance every month, your credit score will take a major hit. If you can’t pay off an entire purchase in one go, be sure that you only spend as much as you’re able to pay off each month.

How Long It Takes to Build Credit

Generally speaking, it will take at least 12 months of responsible behavior on either of these cards before you see an impact on your credit score. For example, let’s say your new card has no annual fee and offers 1% cash back rewards on all purchases.

If you make $1,000 worth of purchases in month one, followed by another $1,000 in month two and another $1,000 in month three (on top of paying off that initial balance each month), then you’ve made $4,000 worth of purchases without spending any money or taking out debt from other sources. Here are some effective ways to use your credit card to build credit:

  • Use credit building cards for everyday expenses and pay off balances in full each month.
  • Make the minimum payment on time every month.
  • Don’t spend more than you can afford on your credit card.

This shall keep you from racking up more debt than you can repay and harming your credit score. Try to make at least one larger purchase if possible (for example, if you buy $500 worth of groceries every week, put that purchase on your card) each month.

It’s not necessary to spend beyond your means in order to build credit. In fact, putting yourself in that situation can do more harm than good.