A while back, my little sister called me asking how she could begin building her credit. She was a few years out of high school and finally got her first “real job.” She had recently gone to rent a car but was told by the company that they would only accept a credit card for the deposit, not a debit card. So, she knew good credit was important to get ahead in life but wanted to know how to build good credit.
How Credit Is Measured
Credit scores are compiled by the reports of 3 companies: Experian, TransUnion, and Equifax. These companies take the information regarding your payment history from places like your credit cards, loan companies, and any possible collection companies.
The Main Things They Look For Are:
- Payment History- If you pay your bills on time
- Credit Length- How long you’ve been paying bills on time
- Credit Utilization Ratio- How much of your available credit you’re using
- How Often You Apply for New Credit
Each company creates their own compilation of your credit reliability and gives you a score. These scores often range from 300-850 (some are higher)
- Credit scores in the mid-600s and higher are often considered a good credit score
- Mid-700s and higher are considered excellent
By law, you have the right to view your credit report from each of these 3 companies for free once every year. You can go to annualcreditreport.com to see your report but not your credit score; that, you can often get, now days, from your credit card company.
Take advantage of this and check your credit report every year. If there are any mistakes, like credit cards you don’t actually have or payments that you made but were reported late, contact the company right away to ensure they correct it.
“So how do I get an excellent credit score if I’m starting from zero?”
Build Your Credit
When you are just starting out, you often need to begin building your good credit from nothing. You can’t build credit if you don’t have anything for the credit report companies to gather information on. There are a few ways you can begin from nothing.
Secured Credit Card
If you are just starting out and do not have consistent income yet, a secured credit card is an easy way to begin proving you can pay your bills on time. Secured credit cards require you to put a deposit of a few hundred dollars down and then that deposit becomes your limit. You can spend up to that amount and just pay it off monthly like a regular card.
Usually after a year or so, you are able to arrange with your bank to give you back your deposit and move you to a regular credit card.
Become an Authorized User
If you have someone in your life, like a parent, sibling, or really good friend who has awesome credit and always pays off their credit cards, you could ask to become an authorized user on their card.
We have done this with our kids now, even though they are under 10. As an authorized user, the on-time payments get reported to your credit report. The authorized user does not need to be given an actual card so while your credit builds, your lack of credit has no negative effect on them but you get the benefits of their on-time payments.
No Annual Fee Rewards Card
If you have a consistent salary and are able to qualify for one, a rewards card with no annual fee is a great way to build credit while enjoying the money back benefits.
Make sure you choose a card with no annual fee; when you’re first building up your credit, you don’t want to worry about spending extra money on fees, especially when there are so many free options out there. Find a card that gives rewards for the things you buy and enjoy the extra money while you build your credit. Just make sure you always pay your bill in full and on-time.
Always Pay On-Time
The most important factor on your credit report is if you pay your bills on-time. Late Payments stay on your credit history for 7 years and bankruptcies for 10 years. You do not want late payments on your credit report. Multiple late or missed payments shows that you are not reliable to lenders and they will report them to the credit reporting agencies, bringing down your credit and effecting your future opportunities for credit.
Set Up Auto Minimum Payments
This one simple trick has saved us so many times! It’s the simplest thing ever! When you first get a credit card, set up your account to automatically pay the minimum payment every month and ensure to keep at least that amount in your bank account at all times to prevent any possible overdrafts.
This one simple trick makes sure you never miss a payment. We’ve been on vacation and forgot to pay a bill before the due date, our auto minimum payment went through and we were saved from suffering a late payment ding on our credit. Considering minimum payments are usually $25-35, it’s an easy trick to build your credit.
Pay Non-Credit Bills Too
Often people think that the only payments that effect their credit are credit card and loan payments, but other bills can have a negative impact on your credit too. If you fall behind on a gym membership or dentist bill, it can get sent to collections. Collection agencies report to the credit companies too which can ding your credit score. Make sure to pay ALL your bills on time.
If you have any Past Due accounts, make sure to contact the company, person, doctor, whoever and make arrangements to catch-up your account. If you show that you are actively trying to pay your bills, most places will work with you and help you correct your account without putting a negative mark on your credit score.
Another trick for boosting your credit score is to contact your utility companies and ask them to report your on-time payments to the reporting companies. Not all utilities will do this but, if they will, it can help. Just make sure that your account is in good standing for a long time before asking so the report has a positive impact.
Keep Older Cards to Build History
As you get older and gain more credit experience, your first credit cards may no longer be of use to you, but if they have no annual fee and can just sit in your bedroom drawer, let them sit there. Their being open shows that you have a long credit history of on-time payments and that brings up your score.
Keep Your Credit Utilization Ratio Low
If you have one credit card with a $5,000 limit and allow a $4,000 balance to build (which you should not do, pay off your cards every month) you have a high credit utilization ratio of 80%. But if you have 3 credit cards with a total limit of $25,000 between the 3 of them and allow a $4,000 balance to build across them, you have a much lower credit utilization ratio.
This may not make any sense to most people but it shows that you are capable of having access to credit and not go crazy using it. If you are close to the limit on any of your cards, start paying them down ASAP.
Limit Applying for New Accounts
In this day and age where it feels like ever other store is offering a discount or bonus miles for opening a new credit card, it can be tempting to accept every card offered to get the prize. But you need to be strategic with this. Every time you open a new account, your credit score takes a short term dip. It makes it look like you NEED the extra credit, so companies start watching to make sure you didn’t recently lose a job which could lead to you falling behind or even failing to make your payments.
After a few months of paying on time, your score will go back to where it was or maybe even better. If, once you have achieved excellent status with your credit score and have no debt, you want to join the travel rewards crowd, go ahead but make sure to space your card opening out by about 3-4 months between each new card application to prevent the short term dips from becoming more long term.
Now let’s build that credit!
The First Rule of Credit Card Club is “Never Carry a Balance.”
The Second Rule of Credit Card Club is “NEVER CARRY A BALANCE!”
How To Build Good Credit
- Get A Credit Card
- Secured Credit Card
- Become an Authorized User
- No Annual Fee Rewards Card
- Always Pay On-Time
- Set Up Auto Minimum Payments
- Pay Non-Credit Bills Too
- Keep Older Cards to Build History
- Keep Your Credit Utilization Ratio Low
- Limit Applying for New Accounts
- NEVER Carry a Balance
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