There are a few things in life that are certain – death, taxes, and having your credit checked. Building good credit should be on everyone’s To-Do list. You need credit for loans, credit for better interest rates, credit for furniture, credit for vehicles, and credit for privileges with brokers – aka you need credit for every major life purchase. Simply having credit is not the tough part (we all can have it). But having GOOD CREDIT is something that takes careful planning and effort on your part.
Whether you are 16 or older, just graduating high school, attending college, or building a career, you can start the process of building credit to prepare yourself for the world of unavoidable credit inquiries.
When I started college, I had zero credit! I worked as many hours as possible to pay my student bills and not make late payments. However, one semester I found my bank account short $500. The fear of dropping out of college sent me on a wild goose chase to find a way to make that payment. Through my research, I found a student credit card that had a $750 limit and 1% cash back – minimal, but exactly what I needed at the time. I applied and got accepted for the credit card, paid my school bill, and paid the balance off as quickly as possible (not paying any interest).
Over the course of my college years, I was able to increase my credit score to the point where I was able to purchase my first rental property a year after graduating. There were several factors that contribute to my increasing credit score. Below are the steps you can take to lengthen your credit history and raise your credit score.
1.) Build credit early
A factor contributing to 15% of your credit score is “length of credit history”. If possible, establish credit as a teenager. However, to do this you will need a co-signer. Since this unrealistic for most people, open your first credit card as soon as possible. I recommend a credit card with no annual fees. You will want to keep this card open forever as your credit score is based on credit length.
2.) Use the credit card
This point is for responsible users only! 30% of your credit score is attributed to what is called “amounts owed”. The optimal amount you want to owe per month should be less than 30% of your credit line, but no less than 10% of all your full credit lines added together. This is called the optimum credit utilization ratio.
Example 1: I have a credit card with a spending limit of $1,000. The most I should charge in any payment period would be 30% or $300.
Example 2: I have two credit cards – one with a spending limit of $1000, and the other with a spending limit of $500. I would want to spend no less than $150 but no more than $450 in any payment period in order to maintain the optimal credit utilization ratio.
3.) Open a Deposit Secured Loan
If you are unable to find a co-signer for your credit card or do not get approved for a credit card, this is the next best option. 10% of your credit score is based on “credit mix in use”. This refers to having multiple and different lines of credit including the following: credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. A deposit secured loan is considered an installment loan giving you another mix to your credit. A deposit secured loan allows you to put your own money down at a bank or financial institution. The bank then loans you the same amount you initially put down, while keeping your initial deposit on hold. In the beginning, this may not make sense, but this is simply a method for raising your credit score. Over time, you follow a payment schedule to pay back the money you “borrowed” plus a small amount of interest. In the end, the money that you deposited in the beginning is returned to you and your credit score is increased. This is the result of you paying back a loan on time in installments.
4.) Make your loan payments on time!
This is the most important step in raising and maintaining a good credit score! Your payment history alone makes up 35% of your score. If you cannot make your payments on time, STOP making purchases on the credit card. Debt has a snowball effect, quickly growing larger and becoming a source of financial difficulty. To ensure you are making your payments on time, utilize your credit card’s automatic payment function that drafts your payment straight out of your bank account. However, if you want to maintain control on your end, you can have your bank automatically send a payment to your credit card. As a final reminder, you can put a calendar alert in your phone or computer, and have your credit card send you payment alerts. In other words, there should be NO EXCUSES FOR PAYING LATE!
5.) “New Credit” – worth 10% of your credit score
If you do not have a long credit history, opening multiple credit accounts in a short period can negatively affect your credit score. When asked to open a credit card at a department store for an additional 50% off, kindly decline if you are at the beginning of your credit journey. You don’t want to risk lowering your credit score because you opened multiple credit accounts in a short period of time.
However, you do need to wisely create “new credit” through one of the avenues listed above. This may include a new credit card, but make sure that you spread these new credit accounts out carefully. Example: only open a new credit line once every six months at the MOST.
Ultimately, be responsible, make wise choices, and have patience. If you follow these steps, you should have a credit score that allows you to begin life fresh and ready to make the next purchase that allows you to invest in your financial future!
If you have any questions about this article, just let us know in the comment section below! We’d be happy to help you out!