So, you’ve reached the point in life where you need to establish your credit and start building your history and score. Congratulations! Credit can get a bad rap when it’s not handled well but if you do your homework and you’re ready to use it responsibly, credit can be used to your benefit. Here’s how.
Step 1: Get a Credit Card
This may seem like a “too-obvious” first step but it’s not one you should make lightly. Do your research. Since you don’t have anything established, you probably won’t qualify for a card with rewards (and if you do, read the fine print carefully). If you’re wary of signing up for a full-blown credit card but still want to earn rewards while establishing credit, apply for a card through a frequently visited and trusted retailer. Your interest rate will likely be higher but if you pay off your balance each month, you can build a good credit foundation without incurring interest charges.
If you’ve recently graduated from high school or are in college, a student-based credit card is certainly worth consideration if becoming an authorized user isn’t an option. While efforts have been made to stifle the more predatory marketing practices, you’ll still need to pay close attention to the details such as APR, fees and limits. You might also consider applying for a “secured” credit card through your financial institution. Secured means that you’ll have an account (checking or savings) tied to the credit card to serve as collateral. Talk to a financial expert about the best option for you based on your needs and habits.
Step 2: Be Responsible
Repeat after me: Do not to spend more than you earn. This financial wisdom holds especially true with credit cards. The most effective way to build an excellent credit score is to pay off your balance, on time, every month. Many first-time credit cardholders get into a good payment habit by setting up their monthly bills, such as cable, insurance or utilities, through their cards. If you’re putting a big purchase on your credit card, try to save up before you put money down and plan to put any extra funds toward the balance.
Lastly, you’ll want to monitor your credit report. You can access your report for free once a year, and it’s something you should definitely do. Not only will you learn your score, but you can also scan the report for errors, which do occur. Anything from a misspelled name to a wrong address can cause issues, so stay on top of your report as best you can.
And there you have it – a two-step process for building credit from scratch. Use common sense and if you need advice, there’s undoubtedly someone at your local credit union who would be happy to speak with you.