How to Build Your Credit

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Good credit isn’t something you can generate overnight. Building a stellar credit report is a process that takes time and effort on the borrower’s part.

That said, life gets easier when you have a good credit history. You’re more likely to be approved for a mortgage or car loan than someone with average credit, for example.

Credit scoring is based on credit card utilization rates, total credit, payment history, number and type of accounts, and length of credit history. This post explains what you can do to build your credit score and why it’s so important for your personal finances. 

A Step-By-Step Guide to Building Credit

  1. Open a bank account
  2. Earn a legitimate income
  3. Start paying down student debt
  4. Shop for a great credit card
  5. Pay your monthly balances
  6. Open new credit cards
  7. Increase your credit limit
  8. Diversify your credit
  9. Keep up with credit management

1. Open a bank account

Your credit journey starts the moment you open a bank account in your name. This can be either a checking account, savings account, or money market account. For most people, this starts during your teenage years when you get your first part-time job.

This may seem like a small step, but it’s actually important because it establishes you in the banking system. 

Even if you have little to no money rolling in, a creditor is going to look at this as a determining factor when deciding whether to give you a credit card. 

You have to start somewhere. And your journey begins with making a decision to put your money in the bank where it’s secure and able to generate interest. 

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Can you get a credit card in high school?

You have to be at least 18 years old to open a credit card in your name. However, you can request a cosigner (e.g., a family member or guardian) to help you get one and start building credit. You may also be able to get a cardholder to issue a card in your name on their account.

Based on your age and limited income, you probably won’t get a large line of credit at first—maybe just a few hundred or a few thousand dollars.

If you’re in high school, you might also want to look into a secured credit card. Essentially, you pay the bank a sum of money (almost like a security deposit of sorts), and they give you a credit card to draw against those funds. It’s up to you to replenish those funds and pay off what you borrow each month. 

While you’re essentially using a credit card against your own money, this is a great way to demonstrate a steady payment history, which should make it easier to get an unsecured credit card (i.e., a “normal” credit card) later.

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2. Earn a legitimate income 

The first big step in your credit journey is to start bringing in a livable wage and get to the point where you’re at least making an entry-level salary. 

You don’t need to make a ton of money or even work full-time to get a card with a decent credit line. You can get a credit card as an independent contractor or even with a part-time job. There are also a variety of credit cards available for college students with very low or even 0% APR.

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Is it a good idea for a young person to have their own credit card?

It largely depends on the individual. Opening a credit card requires knowledge of how the credit system works and the discipline to stick to a budget and avoid overspending. 

If you open a credit card to pay for everyday items (e.g., food and your phone bill), collect rewards, and build your credit, it can be a great thing. If you use it to pay bar tabs and attend concerts without a job, you could wreck your financial future.

Be smart when opening credit cards and use them as tools. Always remember that what you spend, you’re going to have to pay back. And if you don’t pay your credit card balances in full each month, interest will accrue.

TIP: Some credit card issuers charge an annual fee, so be sure to read the fine print before opening an account.

3. Start paying down student debt

Most college students attend school for a few years and graduate with some form of student loan debt to pay off. 

Instead of looking at this as a negative thing, consider it an opportunity to build credit and grow your credit history. Every time you make a payment, you’ll be one step closer to financial freedom. Credit bureaus will take note of the fact that you make payments on time. 

As you pay down your student loans, keep in mind there are no prepayment penalties on federal loans. This isn’t the case with personal loans, which often charge penalties for early repayment. 

As such, you can double down on student loan payments to pay off your loans and get out of debt faster. The faster you pay down your loans, the less interest you’ll have to pay.

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4. Shop for a great credit card

Once you’re on your own and bringing in a livable income, it’s time to move on from whatever introductory credit card you’re using. 

Instead of shutting down your card, pay off the balance in its entirety and put a lock on the account to prevent any unauthorized transactions. Keep the credit card open so you can benefit from having more available credit, more accounts open, and longer credit history.

For example, you may have a card with a $500 introductory credit line. That total gets added to whatever new card you open. So if you open a new card with a $2,000 credit line, you would have $2,500 in credit between the two accounts, which makes your credit file that much more appealing. 

At this point, you should have a few things working to your advantage. You’ll have a banking history dating back to your first bank account and possibly an introductory credit account and a monthly student loan bill. 

The next step is to get a good credit card with legitimate rewards and a larger credit line. Look into providers like Visa, Discover, and American Express.

You may also look for credit cards that reward you for specific activities like traveling or pumping gas. Shop around and find a card or two that meets your exact needs and try to maximize rewards. 

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5. Pay your monthly balances 

Once you have a decent credit card to your name, use it in place of your debit card when making everyday purchases like buying gas, food, and household necessities. 

The most important you can do at this point is to stick to a budget. That way, you don’t wind up accidentally overspending and run into credit card debt. Set a firm limit for yourself, regardless of how much available credit you have on the card. 

Do this for at least a year or longer. Make purchases, pay down your monthly balance, and repeat. 

During that time, pay attention to your credit score and watch how it goes up. As long as you don’t miss any payments, you should notice a healthy uptick. 

You’ll most likely have an average or good credit score due to your limited activity. But don’t worry about it. This will improve over time… as long as you behave, financially speaking.

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6. Open new credit cards 

At a certain point, you’ll need to start scaling your credit if you want to make any major strides toward good credit. 

To accomplish this, consider opening more credit cards. Open another credit card, wait a little bit, then rinse and repeat. 

Just keep in mind that every time you apply for a credit card, the company will have to do a hard inquiry, which will negatively impact your score. So make sure you don’t open too many new cards in a short period of time!

Use cards strategically depending on their rewards structure, and always pay down your balances so they reach zero each month. Remember: carrying balances across multiple cards every month is dangerous, especially when they have high variable rates that exceed 20%. 

Get to a point where you have at least three or four credit cards to your name and at least $20,000 in available credit.

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7. Increase your credit limit 

As you go through your credit journey, making transactions and paying down your debts, don’t forget to ask for periodic credit line increases.

The general rule of thumb is to ask for an increase every six months. As long as you make monthly payments and demonstrate responsible spending, the credit card company should comply and give you a boost.

Keep in mind that, as you increase your limits, that doesn’t give you the freedom to start using all of your available credit. However, the combination of a low credit utilization ratio plus a higher credit limit across all your accounts will almost certainly benefit your score. 

For the best results, try to get to a point where you have no balance and between $50,000 to $100,000 in available credit across your accounts. 

8.  Diversify your credit 

So far, we’ve covered student loans and credit cards. Yet there are many other ways to build credit. 

The next phase of your credit journey should involve expanding and diversifying your credit to improve your credit score. 

Auto loan 

A car loan is an example of an installment loan, which means you’ll need to pay down the loan in monthly payments.

Getting a car loan can be a great way to build credit while also providing you with reliable transportation. Just remember that you need good credit to get a friendly rate on an auto loan. 

If you’re thinking about getting a car, consider working and building up your credit history first. That way, you increase your chances of getting the best possible rate.

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Mortgage loan 

Eventually, you might want to buy a house. This will be one of the biggest financial tests of your life. It will be the culmination of all your years of hard work building and managing credit.

If you put in the time to maintain strong credit and never miss any monthly payments, you could wind up getting a great mortgage with a solid interest rate, and you’ll have decades to pay it off. 

Of course, your credit usage will skyrocket by hundreds of thousands of dollars. 

Unfortunately, paying down your mortgage won’t dramatically improve your credit score. However, it’s still a large installment loan and a great way to build and diversify your credit over time.

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Personal loans 

Yet another way to build your credit score is to take out personal credit builder loans. This strategy can put cash directly in your pocket to fund projects like home renovations or even debt consolidation.

Just remember that personal loans often have prepayment penalties. So, make sure you stick to paying an acceptable amount every month. 

If you pay off a personal loan too early, you could wind up paying extra in fees. One way to avoid this is to set up automatic payments.

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9. Keep up with credit management 

Managing credit is like maintaining your personal reputation. It’s fragile and you can wreck it with just a few bad decisions. 

Unfortunately, there is no finish line you can reach where you’re free from credit management. Consumers often dream about paying off all their cards and mortgage and getting to a position where they don’t have to worry about credit. 

But actually, having no open credit can damage your score. 

The best thing to do is to keep a small amount of revolving credit open every month, pay down your credit card balance, and stay active about monitoring your debt. With the right approach, debt can be a powerful tool you can use to get ahead.

TIP: Check out some of the top credit monitoring services to always stay on top of your credit score.

Tips For Building Credit 

Keep your cards locked when they’re not in use

Using credit cards can be very tempting. You may be out to dinner and not think twice about running up a large tab if you have the means to put it on a card. Or, you may buy the lawnmower that costs twice as much because you don’t have to pay for it in cash. 

This way of thinking can be very damaging to your personal finances. Avoid living outside of your means, and stick to a budget that aligns with your monthly cash flow. 

If you don’t have self-discipline, consider keeping most of your credit cards locked so that you have to actively lift the lock to use it and take on debt. This small action could create a buffer between you and the card, forcing you to think about your decisions before splurging. 

Pay your bills on time

Whatever you do, avoid missing a monthly payment on a bill. Set reminders and consider putting bills on autopay so you don’t accidentally forget about them. 

Whenever possible, pay your bills in full to avoid carrying over balances to your next statement. In an ideal world, you’d pay all of your balances in full each month.

Monitor your credit 

As you grow your credit and take on new accounts, it can be difficult to track your usage. Remember to always monitor your credit on a daily basis and sign up for real-time alerts of suspicious activity. 

Responsible credit management requires frequent monitoring. Check out companies like Credit Sesame and Credit Karma to get started.

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Frequently Asked Questions

What is a good credit score?

Each major credit bureau (Experian, TransUnion, and Equifax) has their own scoring model for credit, as do smaller firms like VantageScore. 

You can fall into three categories:

  • Bad credit: 300 – 629
  • Fair credit: 630 – 689
  • Good credit: 670 to 719
  • Excellent credit: 720 – 850

Will making a minimum payment impact my credit score?

Making a minimum payment at the time of a due date won’t hurt your score because you’ll be paying on time. The bigger factor at play here is the credit utilization ratio, which is the total amount of debt outstanding against your credit limit.

If you only make monthly minimum payments and you have high account balances on your credit cards, your credit utilization will remain high and your score will suffer because of it.

Can late payments damage your credit score?

You should strongly prioritize making payments on time. While most financial institutions provide a short grace period for making payments, you don’t want to get in the habit of missing due dates. Missed payments can directly impact your credit score while also causing you to accrue hefty interest charges. 

What is a FICO score?

A FICO score is one type of credit score, offered by the organization formerly known as Fair, Isaac and Company. Some lenders use FICO scores to determine whether or not to approve loans.

Do you need to give your Social Security number when opening a credit card?

Giving away your Social Security digits may feel invasive, but it’s the only way you’re going to get a legitimate credit card. 

Yet credit card companies are required to ask for your SSN when issuing lines of credit and personal loans. So, don’t feel bad about having to surrender it. 

Just make sure you do it safely and discreetly if you’re reading it out over the phone.

What is an authorized user on a credit card?

An authorized user is someone listed on a credit card account who is not the primary account holder. In many cases, this may be a parent, spouse, or child. 

An authorized user has the ability to use a card in full. However, they typically can’t make administrative or policy changes without the consent of the account owner. 

For example, the credit card owner may decide to place a lock on a credit card. An authorized user, on the other hand, will most likely be barred from changing that policy or shutting the card down.

The Bottom Line

If you’re just starting out in your credit journey, you have a clean slate to build strong credit and get ahead in your finances. Follow the instructions outlined above to build credit, and you’ll be well on your way to securing a strong financial future. 

By practicing responsible credit usage, debt can be one of the best tools that you have in your financial portfolio. On the flipside, abusing credit can make your life very difficult. 

At the end of the day, you need to remember that building credit is not a destination but an ongoing journey. Once you decide to open a line of credit, you’ll need to manage your credit score for your entire life.

By developing solid credit habits—paying your bills on time and in full, and keeping your credit card utilization rates low—the task of credit management becomes a whole lot easier, and you can focus more of your attention on building long-term financial independence.

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