When it comes to building credit, every single one of us starts our financial journey at the same starting point. We all start out without any credit whatsoever. A clean slate of sorts.
However, that changes very quickly when you start building your credit. From the day you start using your first credit card, every credit move you make becomes part of your credit history and will either move you towards good or bad credit.
Bad credit can seriously deter you from things such as being able to purchase your first home, finance your education, or even purchase a new vehicle. It can ultimately impact your ability to get approved for many financial products and services, which can hinder financial progress and get in the way of reaching your goals. This is why it’s so important to build good credit and practice good financial habits as early as possible.
If you want to build and maintain a good credit history, then using credit responsibly is a must. You can avoid bad credit by simply making the right choices with loans, credit cards, and other financial accounts. Not to mention that building good credit history before you actually need it will make life much easier.
Here are some ways you can get started and build good credit.
How to start building credit from scratch
Getting credit for the first time isn’t the easiest process.
Many, if not most, creditors prefer you to have existing credit before they give you any, which can make it challenging to get started. However, once you’ve gotten any type credit for the first time, the next time will be significantly easier.
If you’re just starting to build your credit, it’s important to know that it can take at least six months before you receive a credit score. This is because credit algorithms require you to have at least one account active for a minimum of six months before any credit scores can be generated.
One of the best ways is to be intentional about how you approach every type of credit account. Focus on building a positive payment history and avoid damaging credit mistakes. Here are multiple strategies you can use to build your credit relatively quickly.
1. Become an authorized user
Becoming an authorized user is a relatively quick and easy way to start building your credit. Being an authorized user means that you’re able to use another person’s credit card without the responsibility of making any payments — Not on paper at least.
Once you’re an authorized user, the entire credit history will be added to your credit report and factored into your score as well.
Ideally, you’ll want to be added to a friend or family member’s account with a low balance and no history of late payments. Avoid getting added as an authorized user where you know there are already existing troubles in terms of bad credit history and a history of late payments.
2. Apply for a secured credit card with a higher credit limit
One of the easiest ways for beginners to receive credit is to apply for a credit card that has been targeted for people who are new to credit and have no prior credit history. Check with your bank and/or financial service provider to see if there are any current offerings for a credit product designated for someone with limited history such as a secured credit card.
A secured credit card requires you to make a security deposit to receive a limit on the card and is, therefore, easier to get approved for. By using a secured credit card responsibly, you’ll be able to steadily boost your credit score in a safe and secured way. This can help you then qualify for unsecured credit cards with higher limits.
Remember, it’s important not to over do it when it comes to your credit limits. While you might be in a rush to increase your spending limit, you’ll soon realize that a slow and steady approach is the way to go.
3. Watch out for red flags
It can be easy to make financial mistakes when you’re just getting started with credit. While it’s normal, it’s also important to understand that some mistakes can have a detrimental impact on your credit score.
Because of that, you’ll want to keep in mind the following tips when you’re applying for credit for the first time:
- Limit your applications for new credit. Each time you apply for credit, an inquiry will be added to your credit report. Too many credit inquiries in a short amount of time can harm your score. This is because it will look as though you’re desperate for credit. One of the best ways to build your credit safely is by making sure that you are only applying for credit when necessary.
- Be cautious of offers that guarantee approval no matter your credit history. You might have come across offers like these in the past. Offers like this are usually credit card scams that will end up costing you much more than you spend.
- Limit the number of credit cards you take on. A common myth is that having multiple credit cards will make your credit score shoot through the roof. However, that is actually quite opposite from the truth. By taking on too many credit cards in a short amount of time, you can hurt your credit score. Not to mention that you also run the risk of late payments and creating more debt than you can afford to repay. Starting with just one credit card is typically the best decision.
How to build and maintain good credit
Building a positive credit history isn’t difficult in theory, but it does require a commitment to responsible borrowing. Using your credit wisely is what will ultimately help you build and maintain a good score. It’s also a good financial habit that can help you stay focused and achieve your goals.
Once you receive credit, the most important thing to do is to keep control of it so you can achieve your financial goals without digging yourself into debt.
Use the following practical tips to maintain a good credit score:
1. Be aware of what goes into a good credit score
It’s significantly easier to maintain a good credit score once you know what’s being factored in. There are five key pieces of information used to calculate your credit score. These include:
- Your payment history
- The total level of debt
- Credit age
- Your credit mix
- Recent credit
Understanding these five components can help you make better decisions when it comes to building and managing your credit.
2. Pay your bills on time each month
Paying your bills on time is the best thing you can do to build a good credit score. Payment history is the single largest factor affecting your credit score. By paying on time and avoiding any late payments, you’ll help yourself stay away from bad credit.
Remember, for payments to be considered on time, you are only required to make the minimum payment. Make it a goal to pay at least the minimum by the monthly due date.
Missing monthly payments on any type of credit account can have a serious implication on your credit score. A single late payment can lower your score by several points—consecutively paying late can lead to worse scenarios, including collections, foreclosure, and repossession.
3. Keep your credit balances low
The second most significant influence on your credit score is your overall level of debt. Credit scores consider the total amount of debt you have, as well as how your credit balances compare to your credit limits—also known as your credit utilization.
For example, if the balance on your credit card is $500 and your credit limit is $1,500, then your credit utilization for that credit card is 30%.
Your credit score will suffer if you run up a big credit card balance without paying it off. Not to mention your interest payments will continue to compound. Keeping your credit card utilization below 30% is ideal for building good credit. However, it’s always best to pay off any credits or outstanding debt in full when you can.
One of the best ways to always maintain a low balance is to make sure that you’re only using your credit card, or other types or credit, when you need to, and that you’re staying on top of payment dates. And especially avoid using your credit card if you have cash readily available.
4. Build your credit with more than a credit card
Remember, credit cards are not the only option for building credit. You should be mixing up the types of credit you have with both installment accounts (set, equal payments for a specific period of time such as student or auto loans) and revolving credit (credit cards).
Essentially, maintaining different types of credit demonstrates your ability to handle different types of loan and service payments. In fact, commonly used FICO Scores count your mix of credit as 10% of your overall score.
5. Keep credit cards open
The length of your credit history also has an impact on your overall credit score. When you close a credit card, the issuer will no longer send updates to credit bureaus, and the credit scoring formula will place less weight on inactive accounts. After ten years or so, the closed account’s history will be removed from your credit report. Once you lose that credit history, your average credit age will shorten and your overall score will drop. To maintain a lengthy credit history, keep your cards open.
Closing a credit card will also reduce any available credit. For example, if you were to have three cards that held a combined credit limit of $10,000, and you closed one with a $2,500 limit, your credit limit would be reduced to $7,500. Remember that your goal is to keep your credit card balances at less than 30 percent of your available credit, so by closing this card, you reduce your threshold by $750.
6. Check your credit score regularly
Your credit report can have an affect on many parts of your life, so it’s highly recommended that you check your score regularly. Some of the reasons you should adopt this habit include:
- You’ll know where you stand. Your credit score is an integral part of your total financial health. Whether you’re in good or bad standing, it’s much better to know your credit score than to have no idea how you’re doing. Remember that if your score is bad, there are steps you can take to improve it. On the flip side, if your credit score is positive, you can focus your energy on maintaining it.
When you build a free financial plan with Savology, you’ll get access to a credit score module that will help you analyze and manage your credit score.
- Ensure your credit report is accurate. Your credit score is a direct reflection of the information found in your credit report. Checking your credit score indicates whether or not your credit report is accurate. If your score is lower than you expected, it could be a sign that your report contains errors that will need to be disputed with the credit bureaus.
- The outcome of any applications won’t surprise you. If you haven’t checked your credit score before submitting a lease request, or any other type of application, you could be blindsided by a denial. By knowing where your credit stands, you’ll be prepared for any possible outcomes—even the less desirable ones.
- You’ll get insight into which actions hurt and help your credit score. As you continue to monitor your credit score, you’ll be able to see how specific financial actions will affect your credit. Once you know how certain actions affect your credit score, you’ll know what to avoid.
What is a good credit score?
Keep in mind that a good credit score amounts to a FICO score of at least 670 or a VantageScore of at least 661. Having a good credit score can increase the odds of getting approved for a loan, securing a favourable interest rate, and other terms that can save you money over time.
FICO® Score Ranges:
|Credit Score Ranges||Credit Rating||Percentage (%) of People||Impact|
|300-579||Very Poor||16%||Credit applicants may be required to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.|
|580-669||Fair||17%||Applicants with scores in this range are considered to be subprime borrowers.|
|670-739||Good||21%||Only 8% of applicants in this score range are likely to become seriously delinquent in the future.|
|740-799||Very Good||25%||Applicants with scores here are likely to receive better than average rates from lenders.|
|800-850||Exceptional||21%||Applicants with scores in this range are at the top of the list for the best rates from lenders.|
|Credit Score Ranges||Credit Rating||Percentage (%) of People||Impact|
|300-499||Very Poor||5%||Applicants will not likely be approved for credit.|
|500-600||Poor||21%||Applicants may be approved for some credit, though rates may be unfavorable and with conditions such as larger down payment amounts.|
|601-660||Fair||13%||Applicants may be approved for credit but likely not at competitive rates.|
|661-780||Good||38%||Applicants likely to be approved for credit at competitive rates.|
|781-850||Excellent||23%||Applicants most likely to receive the best rates and most favorable terms on credit accounts.|
Understand and build your credit today
Credit is a powerful tool that can help you achieve your financial goals. By knowing how to build your credit and ensuring your credit history is working for you, you can be confident that you’re laying the foundation for a stable and secure financial future.
Get started today by building a free financial plan that will help you improve your finances by showing you the next steps you need to be taking, including how to manage debts and maintain a good credit score.
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