It’s easy to see that building credit is important. Without a credit score (the number that essentially predicts your ability to pay back a loan), you may not be able to rent an apartment, buy a car or apply for credit cards, and a good score can lead to better loan rates and more. Understanding how to build credit can be trickier, though, which is why we’ve compiled tips that can help.
Lenders look at your credit score (between 300 to 850) as a signal of sorts; the higher the score, the more likely you are to be able to pay it back. This number is determined, in large part, by your credit history, which is a report of your financial past (and current standing). If your credit history shows you’ve been borrowing money for a long time and paying it back, you may have a high credit score, depending on your credit mix and other factors.
When starting to build credit, it’s a good idea to first look at how credit relates to your bigger financial goals, and that means getting up to speed on the basics if you’re not already there. “Most personal finance is taught at home. If you come from a household where finances were not discussed, and you are the first in your family to build wealth, this is all new territory,” says Valerie Rivera, a certified financial planner and founder of FirstGen Wealth in Chicago.
To help you establish a solid fiscal foundation, we asked financial experts to share their top credit-building tips. Try these pointers to help strengthen your financial future.
Because the point of a credit score is to give the lender a sense of whether they’ll get their loaned money back, one of the biggest factors that can strengthen or weaken a credit score is your record of paying bills on time. The longer your history of successfully paying bills, the higher your credit score may be.
This is sometimes easier said than done, of course, especially if your salary fluctuates, or if you have student debt, other loans or other expenses and find it tough to make every payment. But one thing that can help you follow through is examining your budget. “Take a moment to truly see where your money goes,” Rivera says. She suggests writing down “every single expense that is required to keep your lights on every month,” adding, “This isn't about judgment, but rather about gaining a clear understanding of your financial flow.
Next, you’ll want to devise a system for tracking your expenses and making sure you always have the money to cover them. There’s no one universal way to do it. You could use a calendar to list your bills and paydays, for example, or you might want everything in a digital spreadsheet to easily track expenses month month. Rivera notes that, for a semi-annual car insurance bill or others that aren’t sent monthly, this money could hang out in a savings account collecting interest before it’s time to pay.
High debt may not necessarily hurt your credit score, but unmanageable debt probably will. However, if you have maxed out your credit cards and missed a mortgage or rent payment, your credit score will start to drop.
Paying off credit card debts in full every month is ideal, but if that isn’t possible, and if you are close to being maxed out, it’s worthwhile to try to pay more than the minimum, says Rakesha Gupta, a business professor at Adelphi University in Garden City, New York. If you make only the minimum payments, funds that go toward the principal debt are just a small portion of this payment, the interest will compound, and you’ll end up owing money for far longer.
A secured credit card is generally designed for people with bad credit or no credit history. If you have none because you’ve never taken out a loan, you may be responsible with but a lender doesn’t know that yet, which can keep you from being approved for a regular credit card. That’s why applying for a secured credit card might be the way to go.
This type of card will require you to give a refundable deposit that becomes your credit limit. It’s often around $300, but you may choose to pay more, like $1,000, if you want a bigger credit limit. Once you’ve made your payment, a secured credit card can be used like a regular credit card to make purchases, within your available credit limit, with the intent to pay it back by the due date in full each month or with the required minimum payment. If you make a minimum payment, you’ll pay interest on the amount you haven’t paid back. Required payments not made by the due date typically trigger a late fee and higher interest, which would then impact your credit score.
If you do make on-time payments for a period of time, the credit card issuer may refund back your a regular, unsecured credit card. That’s the goal because unsecured credit cards typically offer rewards (such as points for travel or cash back rewards), and there’s also the potential for a lower annual percentage rate.
A student credit card is a type of unsecured card usually aimed at this demographic that may have no or limited credit. Typically, there is no annual fee. and it may be easier to get approved for one.
As you improve your credit score, you’ll want to regularly monitor it. Many credit cards will give you your credit score at no cost, and if you go to AnnualCreditReport.com, you can get a free credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion).
Looking at your report allows you to see who and what you owe, to keep track. It also gives you a chance to spot any potential mistakes or instances of identity theft, which can bring down your score considerably.
It’s also worth recognizing that building credit is a gradual process. It takes time, says Gupta, “and it requires discipline in managing your spending.” Even if you haven’t exactly been mindful with your money up to this point, you can start now — and give yourself a break if you’ve made some financial mistakes in the past.
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