Building and maintaining good credit is essential for achieving financial goals like buying a home, securing a car loan, or even getting a job. However, the world of credit can be confusing, especially if you're just starting out. Let's break it down to see what actually helps your credit over the years, and what could hurt it.
What Is Credit?
As many may already know, credit is the ability to borrow money with the promise to repay it later. Lenders, such as banks or credit card companies, use your credit history to determine how likely you are to repay borrowed money. This history is reflected in your credit score— a number that ranges from 300 to 850. The higher your score, the more trustworthy you appear to lenders.
How to Build Credit from Scratch
If you're new to credit, or just need a reminder, here are some practical steps to start building credit:
1. Open a Secured Credit Card
A secured credit card requires a deposit that serves as your credit limit. For example, if you deposit $200, your credit limit is $200. Use the card for small purchases and pay off the balance in full each month to build a positive credit history.
2. Become an Authorized User
Ask a trusted family member or friend if you can be added as an authorized user on their existing credit card account. This allows you to benefit from their positive payment history, which can boost your credit score.
3. Apply for a Student or Starter Credit Card
If you're a student or have limited credit history, consider applying for a student or starter credit card. These cards are designed for individuals new to credit and often have lower credit limits and more lenient approval requirements.
4. Use a Co-Signer
If you're having trouble qualifying for a loan or credit card, a co-signer with a good credit history can help. The co-signer agrees to repay the debt if you can't, which reduces the lender's risk.
What Helps Your Credit
To build and maintain a good credit score, focus on these key factors:
Pay Bills on Time
Your payment history makes up 35% of your credit score. Always pay your bills, including credit cards, loans, and utilities, on time. Even one missed payment can negatively impact your score.
Keep Credit Utilization Low
Credit utilization is the ratio of your credit card balances to your credit limits. Aim to use no more than 30% of your available credit. For example, if your credit limit is $1,000, try to keep your balance below $300.
Monitor Your Credit Report
Regularly check your credit report for errors or signs of identity theft. You're entitled to a free credit report from each of the three major credit bureaus— Equifax, Experian, and TransUnion— once a year at AnnualCreditReport.com.
Request a Credit Limit Increase
After several months of responsible credit use, consider requesting a credit limit increase. This can lower your credit utilization ratio and potentially improve your credit score.
What Hurts Your Credit
Avoid these common mistakes that can damage your credit score:
Missing Payments
Late or missed payments can stay on your credit report for up to seven years and significantly lower your score. Set up reminders or automatic payments to ensure you never miss a due date.
Maxing Out Credit Cards
Using a large portion of your available credit can signal to lenders that you're overextended and may struggle to repay debt. Keep balances low to maintain a healthy credit score.
Applying for Too Much Credit at Once
Each credit application results in a hard inquiry on your credit report, which can temporarily lower your score. Apply for credit only when necessary and space out applications to minimize the impact.
Closing Old Accounts
The length of your credit history accounts for 15% of your credit score. Closing old accounts can shorten your credit history and potentially lower your score. Keep older accounts open, even if you don't use them frequently.
Building and maintaining good credit is a journey that requires patience and responsible financial habits
By paying bills on time, keeping credit utilization low, and avoiding common pitfalls, you can establish a strong credit foundation that will serve you well in achieving your financial goals.
Remember, credit is a tool— use it wisely, and it can open doors to opportunities like homeownership, better loan terms, and financial peace of mind.