When first starting out building credit, it can be sort of confusing. There are certain things you need to do in order to build a good credit score. When I signed up for my first credit card, there was no guidance. My banker didn’t offer any explanation on how to use and not use my card.
Follow these tips to build a good credit score early, so you can set yourself up for success. Be sure to check out the Finance page for more tips on improving your finances.
1. Sign Up For Credit Early
This one really depends on how you feel, but the earlier you begin building credit the better. I recommend signing up for a credit card right after graduating high school. There’s no need for one in high school, but as soon as you’re off to college it’s safer to have a credit card to have in addition in case of emergencies.
The earlier you start your account, the longer you have to build good credit. The longer you have an account, the better your score will be. If you don’t have a credit card yet, be sure to check out the 5 Best Student Credit Cards For First Time Users article.
2. Pay Off Your Full Balance Every Month
This might have been so naive, but I didn’t know this was a MUST to building good credit. When you spend $200-$300 on your card and your bank says minimum payment due is $25, don’t fall for it! All of that money you spent and don’t pay off is racking up interest. You will basically pay the bank free money until you pay off your total balance.
One key rule to using a credit card is to use it how you’d use a debit card. You ONLY spend the money that you have in your bank account already!
3. Use Only 30% Of Your Allowance
This is something else I didn’t know was important when I signed up for my first credit card. If you have a limit starting out of $500, and you’re putting $450 on your card every month, it will ding you some points.
Now, this isn’t a super huge deal especially if you’re making your payments on time every month and paying the full balance, but it’s something to watch out for. Generally keep your spending to about 30% of your limit.
4. Keep Your Existing Accounts Open
This goes in hand with the first tip of starting early. Your credit will improve the longer you have accounts open. Even if you have an old card that you are no longer using, don’t close the account.
You will get docked for closing accounts early. Consistency is going to be key here.
5. Have Multiple Accounts
BE CAREFUL with this one. Having multiple accounts open and for many years improves your credit score greatly. However, by having multiple accounts open you have a lot more to keep track of and can put yourself at risk.
My general rule of thumb is only open accounts as needed. Label specific cards based on their rewards. If one card has the best gas and grocery rewards, only use that for those items. If another card has restaurant rewards then only use that for eating out.
6. Ask Your Bank To Cap Your Limit
When you have an account open for a long period of time, you will notice your credit limit gradually increasing. I opened my first account with a limit of $800 and over the next year it increased to $1400. I made sure to ask my bank to stop increasing my limit.
This is because if you have a strong savings already, you shouldn’t need more than a certain amount as your emergency backup. For me, $1400 is plenty to have in case of emergency, but I don’t want to rely on that. Capping your limit also ensures that you won’t put yourself into serious debt if something were to happen.
7. Regularly Check Your Transaction History
You should always, always, always know how much money you’re spending and when you’re spending it. Just recently I had my first fraudulent transactions appear on my account. Because I wasn’t totally convinced it wasn’t me yet, I delayed shutting off my card another day and $250 was spent at Target.
You should be regularly checking your transaction history and reporting fraud immediately if it happens. The last thing you want is to be responsible for an amount of money that was stolen and having it hurt your score.
If you’re looking for other ways to improve your credit check out this article for account holders who need to improve their already low score.