As important as credit is to our lives, we don’t get a proper education on what it takes to build credit. Your credit comes into play as soon as you enter the real world as you start applying for things like apartments, utility services, and even a cell phone. Building credit isn’t difficult, but you do have to follow a certain process and avoid critical mistakes that could derail your progress.
1. Start by getting new credit
Yes, you need credit to build credit. This is the toughest hurdle to cross since many credit card issuers and banks require you to have credit before they’ll approve an application for you. Fortunately, there are a few options for those who are just starting out with credit. Building credit cards is a great place to begin.
Get a student credit card. If you’re enrolled in college, you may be able to get approved for a student credit card without much trouble. Most major credit card issuers have at least one student credit card. When you’re looking at student credit cards, aim for one with no annual fee and a low APR or annual percentage rate.
Apply for a secured credit card. A secured credit card is a type of credit card that requires you to make a security deposit against the credit limit for the credit card. Secured credit cards are a great option for building credit because the security deposit makes it easier to be approved for the credit card. Once you’ve saved up at least $200, you’re ready to apply. Make sure you choose one from a reputable company that reports to the major credit bureaus. Watch out for secured credit cards that have high fees or APRs.
Ask someone to cosign for you. You can improve your chances of getting approved by having a friend or relative cosign with you. The account will appear on both of your credit reports and affect both your credit scores. To protect your credit, your cosigner’s credit, and your relationship, make all your monthly payments on time.
Become an authorized user on someone else’s credit card. Cosigning is risky and you may have a hard time finding someone who’s willing to take on the responsibility. Becoming an authorized user poses less of a risk because you’re being added to someone’s existing account. You have the privilege of making purchases, but you’re not responsible for making any of the payments. The entire account history will show up on your credit report and factor into your credit score. Being an authorized user on a healthy account will help you build your own credit.
Once the authorized user account is on your credit report and factored into your credit score, you can try applying for credit on your own.
2. Make all your monthly payments on time.
Payment history is the most important factor when it comes to building credit tips. The point of getting new credit accounts is so you can begin establishing a positive payment history. Once you have a new credit card, whether it’s a student credit card, secured credit card, or another type of account, you should always make your monthly payments on time. The more timely payments you have, the more your credit score improves.
Charging a small amount on your credit card each month then paying your balance in full is a good habit to create. Not only will it help you build credit, it will also help you maintain good credit once you have it.
Unless you have a charge card (which is less likely when you’re just starting to build your credit), your credit card issuer won’t require you to pay your full credit card balance each month. Instead, you’ll have the ability to make a small minimum payment. As long as you make the minimum payment by the due date, your payment is considered on time and your account is in good standing. However, when you pay just the minimum, you end up paying interest on your balance and risk getting into debt if you keep making purchases. Ideally, you should pay your credit card balance in full each month.
3. Keep your credit card balances low.
The amount of debt you’re carrying is the second biggest factor that influences your credit score. If you have high credit card balances (relative to your credit limits), you could hinder your credit building progress. A good rule of thumb is to keep your credit card balances below 30% of your credit limit. On a credit card with a $500 credit limit, for example, you should keep your balance below $150 to build good credit.
Your credit card balance is reported to the credit bureaus once a month, typically on the day your billing statement is printed. If you previously charged a high balance on your credit card, you can pay it off and maintain a small balance on your credit card for the next several weeks. The next time your credit card details are updated on your credit report, your lower balance will be reported and will be reflected in your credit score.
4. Avoid applying for too many accounts.
While you do need credit accounts to build credit, having too many accounts can work against you. First, your credit takes a small hit each time a business needs to check your credit to approve an application. Second, opening too many accounts in a short period of time can hurt your credit score. Avoid the “shotgun” approach when it comes building credit loans and debt.
Taking on too many accounts also puts you at risk of getting into too much debt. You’ll have to be diligent about only using a small amount of your available credit to ensure you can always afford to pay off your credit card balances each month.
5. Keep up with your progress by monitoring your credit score.
Once you’ve had at least one account open and active for at least six months, you’ll be able to check your credit score. You can use a free service like Credit Karma, Credit Sesame, or WalletHub to keep tabs on how your credit score is moving. These services give you insight into how your actions, like debt balances and payment history, are affecting your credit score. As you use your accounts, make your payments on time, and maintain a low amount of debt, you’ll see your credit score rise each month.