How to Build Credit in 8 Simple Steps
Building credit from scratch doesn’t have to be difficult. The best way to build credit is to open a credit card, preferably one with no annual fee, and use it responsibly. That means paying your bill on time every month you decide to use the card or simply locking it in a drawer. Just having an open line of credit that is in good standing will help you build credit.
But a clean financial slate is a double-edged sword. You could shed months, or even years, off your credit-building timeline and save thousands of dollars if you make the right moves. Or you could quickly find yourself with bad credit if you act irresponsibly.
Taking the following steps will help you keep the good ship credit score sailing in the right direction. Just think of them as your treasure map, and enjoy the journey.
1. Check Your Credit Report
It’s a good idea to get in the habit of regularly reviewing your credit report, anyway. But it’s especially important to give it a look early on, just to confirm that your biographical information is correct and there are no signs of identity theft. You might even find that you’ve already built a bit of credit – from being an authorized user on a family member’s credit card, for example.
The contents of our major credit reports also serve as the basis for all credit scores. So your rating will only ever be as good as your report is. However, you’re unlikely to even have a credit score at this point if you’ve yet to open your first line of credit.
You can get unlimited access to your full credit report, updated daily, by signing up for a free WalletHub account.
2. Open the Right Credit Card
There are a few reasons why using a credit card responsibly is the best way to build credit. Credit cards are fairly easy to get, for one thing, especially when you consider secured options. Credit Cards can also be free to use. There are hundreds of no-annual-fee credit cards to choose from, and you don’t have to go into debt when you get one. Simply having an open credit card account will help you build credit.
That’s because all credit cards report account information to the major credit bureaus on a monthly basis. And all of that, in turn, gives us easy access to a way of regularly adding positive information to our credit reports, which is the key to building credit.
But choose carefully. Plenty of cards have the potential to be more trouble than they’re worth. And blindly applying for credit is counterproductive. Each application results in a “hard inquiry” into your credit history, which can lead to temporary credit-score damage, especially when you apply repeatedly within a short period of time. Your goal should be to apply just once, for the card that offers the best terms for your needs and a high likelihood of approval.
We typically recommend seeking out a no-annual-fee credit card for either people with limited credit or students, as the case may be. If you don’t get approved for either, place a deposit on a no-annual-fee secured credit card, which offers the closest thing to guaranteed approval that you’ll find.
3. Strive to Never Miss a Payment
Payment history accounts for up to 40% of your credit score. This doesn’t directly disadvantage credit novices, as your on-time payment percentage is what matters most. But mistakes are magnified when you have limited or no credit history.
For example, you’re batting just 83% if you’re late with one of your first six monthly credit-card payments. But making 599 out of 600 payments on time leaves you with an average over 99%.
One way to improve your chances of success in this credit-score category is to keep your spending under control. Spending only what you can afford to repay in full each month, in the case of a credit line, makes missed payments less likely. It also encourages responsible credit utilization, which is another important component of your credit score.
Setting up automatic monthly payments from a deposit account can work wonders as well, particularly if you schedule them for a few days after your paycheck comes in. This basically ensures that you’ll have enough money in your account to cover the payment. And it will help you prioritize your bills and credit standing over unnecessary purchases later in the month.
4. Build a Financial Safety Net
Budgeting is one of the oldest tricks in the book, albeit not a very popular one. But without a budget, you can easily find yourself stretched thin or falling behind on savings, each of which introduces a whole new set of complications for your credit score. And the process isn’t as laborious or time-consuming as you might assume. You don’t need to budget every day or even every week. An hour or two a month is sufficient and will go a long way. If you need some inspiration, check out our top 10 budgeting tips and collection of budget templates.
In the course of your budgeting efforts, make sure to carve out some room for emergency-fund contributions. An emergency fund gives you a financial safety net, which will catch you in the event of job loss or unexpected expenses that could otherwise wreak havoc on your credit. So aim to save two months’ pay per year. And increase your contributions when you’re feeling flush, until you put away a year’s worth of take-home pay.
5. Double Down on Credit & Use Loans as Needed
Once you’ve had your first credit card for at least a year, consider applying for another. Assuming you’ve used that first card responsibly, your credit score should have improved enough for you to qualify for a better deal. Plus, adding another line of credit will increase your total available credit. And that will help your credit utilization ratio and, in turn, your credit score.
It’s also important to note that the diversity of your credit experience accounts for about 10% of your credit score. You never want to rush a decision as momentous as buying a car or house. It takes time to groom the credit standing needed for a decent loan, for one thing. But if you’re ready to take that step, it could benefit your credit score in the long run.
6. Monitor Your Credit
No one has time to keep an eye on their credit report 24/7. Two-thirds of adult consumers haven’t even reviewed their credit reports in the past 12 months. But identity theft, financial fraud and credit-report errors can rear their ugly heads at any time. And the longer you wait to address them, the worse the symptoms will be for your wallet. That’s what makes credit monitoring so vital.
Many services offer free 24/7 credit monitoring, including WalletHub. We’ll tell you whenever an important change is made to your TransUnion credit report so you can see if it’s accurate and take steps to fix the problem if it’s not. This can work wonders for your peace of mind, but it’s not a panacea. It simply makes it less likely that an issue — such as overspending or a mistake on your file — will go unnoticed.
7. Concentrate on Consistency
Credit success is all about consistency. So spend and borrow within your means, and keep your accounts open and in good standing for as long as possible. If you don’t trust yourself to spend within reason and always pay your bill by the due date, you’re better off locking your card in a drawer.
You can still build credit with a zero balance, and there are many credit cards with no annual fee to choose from. Just bear in mind that your account could be closed after a prolonged period of inactivity.
8. Watch & Learn
Significant credit-score gains may be measured in months, but fluctuations occur daily. And WalletHub is the only website that offers free credit scores updated that often. Seeing how, and if, your credit score changes from day to day will tell you a lot about how the process works and what impact certain actions have on your rating. WalletHub’s customized credit analysis will also tell you exactly where you can improve and how to do so.
You can and should apply this same principle to your monthly credit-card and loan statements. Keeping a close eye on these documents could help you identify inaccurate charges or patterns of overspending.
Now that you know how to build credit from the ground floor, it’s time to go out and do it. If you follow these tips, you’ll be setting yourself up for a brighter financial future and a whole lot of savings.
As you embark on your journey to top WalletFitness, it might also be helpful to know a bit more about what not to do. So check out WalletHub’s articles explaining why credit scores drop and the damage that derogatory marks can do.
Image: Lise Gagne / iStock.
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