Charles H. Miller
Today we’re going back to basics, to show the young how they can start building their credit score… so that they could benefit from new opportunities that will be open to them once they reach a certain threshold. Here’s what we’ve got…
1. Start early
And by early, we mean as soon as you can. Your credit history makes up 15 percent of your credit score, so the longer your history is, the better you score could be. This, naturally, presumes that you have been a responsible user throughout the years. Otherwise, this will work against you.
Generally speaking, you can get your own credit card once you reach the age of 21. But there is a workaround to apply for one even earlier…
2. Get a partner
This presumes that you are not old enough to have your own credit card and will rather have to “share” it with someone, like one of your parents. There are multiple ways to do this:
Become an authorized user
As an authorized user, you get someone else’s card with zero legal responsibility for paying the bill. The credit bureaus recognize authorized users’ access to credit and will thus attribute some of the cardholder’s good behavior to you. It is important to add that bad behavior of the cardholder will also be attributed to an authorized user. So don’t just get anyone’s credit card.
Get a co-signer
A somewhat different approach can see you being responsible for paying the bill (along with the other co-signer). This way, the payment record will show up on both of your credit reports and could work to your benefit even more. But (again), it presumes that you will actually be paying your bills on time, and if possible, in full.
Get a guarantor
Finally, there’s a third option in which a guarantor is the one responsible for paying the debt if you don’t. However, unlike a co-signer, he/she doesn’t have the privilege of adding charges to the account. Also, the bank will first try to get the cardholder to pay before they go after the guarantor.
3. Apply for a secured credit card
A secured credit card is made for people with bad or no credit history at all. In many ways, it resembles a debit card, with credit card companies requiring that you put down a security deposit of anywhere from $200 to several thousand dollars. From there, they typically set a credit limit to the amount of the deposit, making it a zero-risk product for them.
A secured credit card is good for building one’s credit, but it is best used if you can make regular monthly payments in full. Otherwise, you may quickly rack up debt, as these sort of products tend to come with high fees and/or interest rates.
So if you want one of these, shop around to find the best option for your needs. These days, there are secured cards that offer rewards points, and you may even get something in return for being a financially responsible user.
4. Make regular payments
This is fairly common sense, but not always a common practice. If you are not making regular payments, you will not only hurt your credit score, but also end-up in debt. Remember that payment history is the single biggest factor in a FICO score, weighing in at 35 percent.
Set up auto-payments if you have to, just don’t forget to pay your bills on time. You’ll thank us later.
5. Try paying in full every month
This isn’t feasible for everyone in all situations, but it is the goal worth striving to. Banks would like to keep you in debt as they can charge interest then, but you (should) have a different agenda. By clearing your dues every month, you won’t be making interest payments. Also, if you’re using a credit card that offers some rewards — you will benefit from them, as well.
Finally, by carrying little to no balance on your credit card, you will be improving your credit score, with credit utilization ratio making 30% of the number. In fact, it is the second most important factor in credit score calculations.
6. Get an apartment
You don’t have to buy one, but you can rent it. From there, how regularly you pay rent will be noted in your credit history, with (obviously) regular payers benefiting the most.
If you think you can do that (regularly paying the rent), ask your landlord or property management company to start reporting your payments to credit bureaus.
In contrast, living in the dorms does nothing for your credit score.
7. Consider a credit limit increase
After some time, say a year, you may want to ask your bank to increase your credit card limit. This will also have an impact on your credit utilization ratio, and — if you’ve been responsible with your credit card use — help grow your credit score.
The important thing is to realize that this isn’t some extra, free money. If you plan to spend more, find a way to repay it all back. Racking up debt is easy, but that won’t get you anywhere.
8. Go easy with new credit cards
These days every major store has its own credit card, but do you need all of them? If you’re frequently buying from some stores, it is ok to use their cards and get additional benefits. But this only presumes that you will be paying off your balance regularly. Otherwise, all benefits will be lost to interest payments.
We at Wallet Weekly have multiple cards, and have learned to manage them properly. For instance, I have one card for gas & groceries, one for dining & travel, Amazon’s credit card, and one for everything else.
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Building your credit history is not a rocket science, but it does require some thinking and — more importantly — discipline. We did it, and you can do it, too!
