Q: What are the best cards for building credit in 2013?

A: Are you new to credit or trying to rebuild for the new year? Whatever the case may be, it’s important to realize this:

For building credit, how you use the credit card is more important than what specific card it is.

So before I go over recommendations for bad credit, as well as those for no credit, here are 5 key tips for managing your account in way that will benefit your credit score:

Tip #1: Avoid High Credit Utilization

This is one of the most important tips for how to build credit. It also happens to be one of the most common mistakes made!

Not too long ago, I was chatting with a friend of mine who is in the process of rebuilding his credit. He’s been using a secured credit card and this is what he told me “I use it to pay for everything. My limit is $1,000 and my goal is to charge as close to that number as possible each month.”

I had to explain to him that is a MAJOR MISTAKE! If you use too much of your credit limit, it actually backfires and hurts your FICO score! Why? Because this “credit utilization” is a factor in scoring. Using a high amount of credit = bad news! Ideally you should aim to stay below 25% of your limit at all times.

Tip #2: Don’t Carry a Balance

This is another frequent mistake made when using credit cards to build credit. It’s frightening just how many Americans believe that having a balance is better for credit scores.

You do NOT need to keep a balance to build your credit. Now if you do carry a balance (using a small amount of your credit limit) I’m not claiming that will be bad for your credit score, but it’s simply not necessary. Here’s why…

Each month when your cycle closes, the total amount owed is what gets reported – that’s current charges + any balances you are carrying. So carrying a debt will indeed show account activity each month, but simply using your credit card each month for purchases will accomplish the same thing, too. So why keep a balance? Just use your account each month and pay off the purchases in full.

Tip #3: On-Time Payment History

Did you know that 35% of your FICO credit score is based on payment history? Credit building cards won’t be helpful if you don’t pay your bill on time. So do yourself a favor and do whatever is necessary to MAKE SURE you have that payment in on time each and every month.

To do this you may want to even consider setting up automatic payment using your checking account. But doing that can be risky if you don’t keep close tabs on your current balance (because one month you may have insufficient funds in your checking, so the payment won’t go through).

Tip #4: Keep Tabs on Your Credit Report

Don’t forget to regularly keep tabs on your credit report. This is important because even if it looks like it should right now, you never know in the future when something incorrect might appear, either by accident or due to identity theft. Now I’m not saying you have to go pay for one of those monthly credit monitoring services, but you should at least take advantage of the free credit report all Americans are entitled to once per year.

Tip #5: Have More Than One Credit Account

Not too long ago, someone posted a question the forum – she had a credit history of 5 years but could still not get approved for a mid-tier credit card. It appears the reason was because she had only been using one card with a low limit during that entire time.

As a long term goal, you want to eventually build up to having several different credit accounts on your file – a few revolving accounts (credit cards) as well as at least one or two installment accounts (loans). So if you currently have no cards, you may want to consider getting a couple cards to start out with.

Whew… now that we have all that info out of the way, let’s discuss my recommendations…

Credit Building For Bad Credit?

Rebuilding credit is a bit more difficult than building credit for scratch. This is especially true nowadays, after the banks got burned so badly during the Great Recession. Even though the economy has improved, getting approved for an unsecured credit card will still be tough in 2013, which is why I would recommend a secured card – many have guaranteed approval (if you meet their basic residency and age requirements) and they look the same on your credit report as an unsecured card would.

Compare secured cards for credit building

Credit Building For No Credit?

For college students the easiest ones to get approved for will be student cards. They are typically very accommodating to those with no credit history.

Compare student cards

For all others it will be a little bit trickier to get approved. Often times I see adults that are 25, 30, or older and have never had a credit card. Much to their surprise, when the apply for a basic credit building card they get denied due to insufficient history.

Each person’s circumstance is different, but if you have zero history than I would recommend a good secured card like this.

If you already have a little credit history (such as a loan) then I would recommend cards for fair credit.