6-Step Beginner's Guide to Building Credit
If you have bad credit, important steps such as purchasing a home, using loans to pay for your education and even securing a job can become much more difficult. This is why building solid credit is important. Beginning with your first consumer debt -- often a credit card -- every decision that you make enters your credit history. In order to have a good credit history, you have to use the credit that you have responsibly.
So, how can you do this?
1. Begin Building Credit by Obtaining Credit
Many times, it can be difficult to get your first credit card. Many banks and issuers of credit cards want to look at your existing credit history before they will approve your application. However, there are some steps you can take to open your first credit account. You can:
- Apply for a Secured Credit Card
Secured credit cards such as those offered by the Tier 1 Credit Specialist require you to put down a security deposit to open your account. Your credit limit will be the amount of money that you put on deposit, at least at first. In some cases, your line of credit will be larger than your deposit, but your deposit serves as a sort of collateral. So if you get a secured credit card and put down a deposit of $500, your limit might be $500 or it might be $1000 or more, depending on the issuer. According to Business Insider, this can be a great way to start building credit.
- Apply for a Retail Store Credit Card
Issuers of retail store credit cards generally are more flexible with their credit guidelines. However, take note of the fine print, because the interest rates are often quite high, and the credit limits are quite low. Also, you can only use those cards at specific stores. However, they can be a first step toward credit -- as long as you don't go on a shopping spree that you can't afford to pay back.
- Ask a Friend or Relative to Make You an Authorized User
This means that someone else is adding you to their credit account, and you may get a card in your name from that person. The on-time payments are reported to your credit history. Make sure that the person who is adding you also has solid credit, though, because if they have poor credit, that history will attach to you, as Forbes points out.
- Ask a Friend or Relative to Co-sign for your Loan or Credit Card
If someone that you know has solid credit, that person can apply along with you to help boost your own approval chances. If someone co-signs on a loan or credit card for you, that person shares liability for the account with you. Late payments will impact that person's credit score as well as yours -- so make sure that you can make the payments on time before you ask someone to share their good credit history with you. Once you have some positive credit established, you won't need to have other people apply with you to get approval.
2. Be On Time With Your Payments
Once you have credit up and running, know that payment history is the #1 factor in your credit score. If you make your payments on time, then you will have a good credit score. As you build up a track record of making on-time payments, then your credit score will continue to climb.
Not every monthly bill that you have turns up on your credit score. These include items like your utility payments, car or home insurance and mobile phone payments. However, if you get so far behind that they have to shut off your account and send you to a collection agency to get payment, then that can show up on your credit score as well, and at that point it can do some major damage to your credit score, so make sure you keep those accounts current.
Many times, mobile phone providers and other utility providers will work with you if you let them know ahead of time that you need to adjust your deadline on a particular month, but you need to be proactive. Those companies are a lot harder to work with once the deadline has passed.
3. Start Things Simple
Just open one credit card account to start. Once you're used to the habit of making on-time payments every month -- and paying off your balances every month in full -- then you can think about adding a second card. A common mistake that people make early in their credit history is opening up too many credit cards and running up balances that they cannot afford to pay.
If you have balances outstanding each month, you'll pay interest, and if your balance is too high (more than half of your limit), that can hurt your score as well. Also, applying for a number of cards in a short amount of time increases the number of inquiries into your credit, and multiple inquiries can push your score down.
4. Don't Borrow More Than You Can Pay
Ideally, you'll pay off your balances on your credit cards each month, and you won't take out any more long-term debt (such as a car note) than what you can afford to make payments on each month, as Marketwatch notes.
There may be some months when you have an emergency that you leave in your credit card balance for more than a month, such as an unplanned car repair. However, charging only what you can afford to pay back will keep your balances either low or at zero, minimizing your interest payments.
5. Keep Your Accounts Open
Credit bureaus also look at how long you keep your accounts open. If you have a credit card and keep paying on time over the course of a year, and then several years, the history of the account also helps your credit score. People who jump from one account to the next show less stability than those who develop a long history, which is why this is important for your credit.
As long as you use a credit card once every six months, that account will continue to report for you.
6. Finally - Track Your Credit Score
Keep an eye on your credit score on a regular basis. Most banks have a tool for their account holders that gives them access to at least one of their three credit scores. The Smart Credit service offered by Financial Education Services will keep you up to date on your credit score. Identity thieves often open fraudulent accounts that can shred your credit history in a hurry, and the sooner you point out those mistakes to the credit bureaus, the sooner you can undo the damage.
Credit is a responsibility that can bring you many opportunities. However, with those opportunities come the duty to keep on top of your personal financial situation. You don't want early mistakes with credit cards to keep you from getting a mortgage down the line.
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