How To Build Good Credit
Building and maintaining good credit from the start is a very important part of a healthy financial life. It allows you to qualify for new credit accounts — car loans, credit cards, and mortgages — at the lowest possible interest rates. If you don’t pay your bills on time, miss payments, or go over your spending limit, you’re developing a bad credit history that could lead to higher interest rates and additional fees like late or overlimit fees, and cost you more money later. Some potential employers may review your credit history and you will be denied employment opportunities due to negative credit history. In order to avoid these consequences, start with the basics and work your way up. Really think about the future when making decisions today.
Check out these six steps to help develop good financial habits and begin to build good credit.
1. Get a secured credit card.
A secured credit card is just like a “regular,” or unsecured credit card, only you are required to put down a security deposit — typically $200 to $400 — to provide assurance to the creditor that you will repay your debt. Your credit limit is often the amount of your security deposit, or a percentage of it.
Many people confuse a secured credit card with a debit card, however the two are very different. Banks do not report debit card usage to the credit bureaus, as a debit card is not an extension of credit. A debit card is merely a convenient way to access the funds in your bank account.
How responsible you are with a secured credit card will affect your credit scores — both positively and negatively.
2. Avoid applying or having more than one account.
Each time you apply for a credit card or loan, your credit score takes a small hit. This is not something you want to do when trying to build credit. Instead, use that energy to prove to yourself that you can keep the balance low on one credit card and pay that bill on time every month. Make sure you can handle one before you add more debt.
3. Only charge what you can pay off in full each month.
Building good credit means consistently paying back any and all money you borrow. Your goal is to prove to creditors and lenders that you can be responsible and manage debt. Start small — only charge purchases that you can afford to pay off in full every month.
4. Pay on time every month.
The most important thing to do in order to build and maintain a good credit score is to pay your bills every month on time.
5. Check your credit report and score.
After six months of timely credit card payments, check your status by viewing your both your, credit score and report. Pay attention to what’s on your credit report- positive or negative – so you know where you stand and what you need to work on. Also be sure to look at your credit score to help you make sense of your credit report and give you an idea of how well you’re doing. Equifax offers a free credit report once a year.
6. After a year, apply for an unsecured credit card.
Twelve months of timely payments should be enough to show your credit card company that you can responsibly manage debt. An unsecured card frees you from your security deposit obligation, will likely carry a higher credit limit and may offer useful perks like reward points. If you apply the same responsibility level, you will remain in good standing and keep a decent credit score.