How to improve your credit score with a credit card

Getting a credit card can get you into a world of pain if you don't manage it correctly. All of that access to free money is really tempting, and it can cause some people to overspend. But if you're careful with how you spend on it, a credit card can actually help improve your credit score. Why? Because one of the key factors credit bureaus use when calculating your credit score is your ability to pay off your existing credit and debts on time.

When you take out a credit card, you get the opportunity to demonstrate that you are a responsible borrower. You also have the opportunity to show lenders you have not learnt how to budget, you over-spend, you consistently pay your bills late and overall, you're a bit of a risk when it comes to lending money. See how that works?!

How do credit cards increase your credit score?

They help by showing 'proof' of your track history with money, when you do things like:

• Making your credit card repayments on time and avoiding late fees.
• Paying more than the minimum due payment.
• Not going over the limit.
• Avoiding cash advances, which cost a bomb in interest from the day with you withdraw the money.

Managing your credit card this way can have a positive impact on your credit history and help build your credit score.

That said – getting a credit card will not automatically improve your credit score. It can actually hurt your overall score, if you're judged to have taken out too much credit, or applied for too many cards in a short space of time.

Finder survey: How many Australians have been rejected for credit at different ages?

How to correctly use a credit card to build credit

• Only apply for 1 card at a time. Having too many credit card applications can hurt your credit score, so make sure you compare credit cards and then apply for the one that best suits your needs at the time.
• Make repayments on time. Paying off your credit card balance on or before the due date shows lenders you are responsible with your accounts. Set up automatic payments so you're never later.
• Pay more than the minimum. You're only required to pay a minimum amount on your credit card each month – usually only 2% or 3% of the total amount owing. The rest attracts interest, so pay as much as you can,
• Consolidate debts. If you already have 1 or multiple credit cards, you can transfer them to a balance transfer credit card that charges no interest for up to 30 months. Not only will you save interest, you can also potentially pay off your debts faster and lower your combined credit limits – all of which reflects positively in your credit score.
• Manage your credit limit. If you're planning to apply for another credit card and already have a card with a high credit limit, consider lowering it. Multiple unsecured debts and high credit limits can hurt your credit score.

How fast can I build my credit score with a credit card?

It generally takes around 6 months of reporting your credit activity for the credit bureaus to start taking your credit card use into account.

Your credit report includes details of all the financial products you apply for or use over the course of your life, including credit cards, loans, mortgages and utility accounts such as phone plans and gas or electricity accounts. With a credit card, the following details will be included in your credit report:

• The type of account. Credit cards and loans are generally considered the most "valuable" types of accounts to have listed on your credit history, because they give lenders an indication of your ability to manage and repay a line of credit.
• Loan inquiries. Applications for credit cards and loans are considered "new loan inquiries", which are also listed on your credit report. Several applications for credit in a short time period can hurt your credit score and be a red flag to lenders reviewing your history. However, credit enquiries spread out over time can demonstrate your ability to successfully apply for and manage credit products.
• Credit limit. When you get a credit card, your credit limit is also listed on your credit report. These details help lenders see how much access you have to credit when considering applications for loans and other products.
• Monthly repayment history. Your credit history lists if you pay your credit card on time and whether you pay the minimum or full amount each month. This information also gives lenders an idea of your ability to make timely repayments. You can learn more about what else is included with our guide to understanding your credit report.

Keep in mind that having credit cards will also limit your borrowing power (that is, how much a bank is willing to lend you) as it means the banks will factor in your credit card debt. So, if you want to get a credit card for the main benefit of building your credit, it might be worth cancelling the card before you apply for a home loan.

What's the best credit card to build my credit score in Australia?

Unlike the US and UK, credit card providers in Australia don't really offer dedicated credit builder credit cards. Therefore, the best credit card to build your credit history is the one that you will get approved for, and which you can successfully pay off on time each month. Here are a few different types of credit cards that may help you:

• Low interest rates. You should always aim to pay your balance in full to avoid paying interest, but if you think you might not pay the full balance each month, consider a card that charges a low interest rate. Compared to other cards, interest rates of 8.99% p.a. to 14.99% p.a. are considered low.
• Student or first credit cards. There are some products designed to suit people with limited credit card experience. For example, the ANZ First is a no frills card that is suited for first-time credit card applicants or people who want a basic credit card.
• Low credit limit. A credit card with a low maximum credit limit can help keep your spending in check.

Most Australian credit card issuers won't approve applicants who have a bad credit history. This is why it's important to order a copy of your credit report and score (which you can do for free through Finder) before you apply.

If you have a low credit score, you should spend some time improving it before you apply. Check out our guide to improving your credit score for some tips.

What is a good or bad credit score?

If you're wondering where your credit score sits on the scale and want a goal to work towards, you can look at the credit score bands issued by credit reporting agencies Experian and Equifax below.

Credit band	Experian	Equifax
Excellent	800-1,000	833-1,200
Very good	700-799	726-832
Good	625-699	622-725
Fair / Average	550-624	510-621
Weak / Below average	0-549	0-509

If used responsibly, credit cards can be a useful tool to manage your finances and build a healthy credit history. It's important to spend properly, make timely repayments and pay off as much as your balance as possible each month. If you have a low credit score with negative listings on your report, spend some time improving your score before you apply for a credit card.