When you’re young, you don’t realize the importance of having to build good credit and establishing a good track record with your management of credit. We all know that building credit is important for our future, but that fact never becomes clearer than when you need it. If you failed to maintain your credit card payments when you were young, you may not realize the damage until you apply for your next form of credit.
When it comes to building credit, you don’t always need to open new forms of debt (unless you have nothing to begin with). I’m walking you through 6 simple steps on how to build credit and improve your credit score. Good credit means you become more “credit worthy”, which can come in handy when you want to buy a car, home, or need a loan.
#1 Start Paying those Student Loans
If you have some form of college-level education, it’s very likely that you have student loans. If your student loan payments are currently deferred, you can start building credit by making payments. Since they are deferred, you can make payments that you can afford. Whatever amount you can afford to put towards the student loan payment, do so.
If your student loans are not currently deferred, then make sure your payments are made on time every month. Student loan payments are reported to the 3 credit bureaus (Equifax, Experian, and TransUnion), so failing to pay on time will negatively affect your credit score. Be honest about your payment. If you know you truly cannot afford the payment, consider consolidating or refinancing your loans. You can also look into forbearance options. If you do go the forbearance route, make sure you put something towards them each month.
#2 Don’t Close Old Credit Accounts
According to Money Under 30, most people with credit scores in the top 10th percentile (a score of 800 or better) have at least 10 years of credit history. Since the length of credit history plays a role in your credit score, the longer you have open lines of credit, the better your average length of credit history will be.
With that being said, closing old credit accounts because you don’t use them, or don’t want to be tempted to use them, is not the best approach. Cut them up before you close the account. Once those credit accounts are closed, they no longer count towards your average length of credit history. If you don’t need credit today, you may need it in 10 years, so start building credit now.
#3 Be Smart about Balances You Carry
You don’t have to pay your credit card balance off in full every month (although that’s not a bad idea), but you do have to carry balances the right way. So, what does the “right way” look like? Here it goes:
- Keep your balances below 30% of the credit limit
- Pay more than the minimum each month to ensure interest doesn’t put you over the 30% mark
- Avoid paying late at all costs
As long as you are following the 3 key points above when using credit and carrying it over from month to month, your credit score will not be negatively affected, and you will build a positive credit history. Make sure you never waiver. Slipping up just once could cost your score a few points.
#4 Follow a Budget to Know What to Spend on Your Credit Card
Whether you decide to pay your card off in full every month or keep your balance below the 30% mark, you need to know what you can afford to put on your card. Failing to know your situation and understand what you truly can afford to spend could cost you your credit score. It’s not worth it. Before diving in and using your cards, set up a budget.
Make sure you account for every bill and expense you currently have. Don’t forget about savings too! Subtract the monthly expenses and savings amounts from your monthly income and see what’s left over. Whatever that leftover amount is, decide if that will go towards any discretionary or one-off spending. If so, set that amount as your monthly spending limit on your credit card. When you have a limit in mind, you can follow it. You can also keep tabs on your credit card spending throughout the month to make sure you are staying on track.
#5 Check Your Credit Report Every Year
If you’re gung-ho about monitoring your credit score every month, there are cost-effective services like Privacy Guard or Credit Karma that allow you to see changes in your score. While those are definitely good options, there is a free option!
Thanks to the Fair Credit Reporting Act (FCRA), you are entitled to a free credit report pull each year from all 3 of the credit bureaus. You can take advantage of pulling your free credit report pull thanks to Annual Credit Report. This is a great way to see how your credit has changed over the year. If you are following all of the steps above, you should see an improvement in your score. This is also a great way to make sure nothing suspicious or fraudulent is reporting under your name and social security number. If you see something that shouldn’t be there, act fast. Read How to Fix a Faulty Credit Report for more details.
#6 Protect Yourself from Fraud
I mentioned above that checking your credit report every year will allow you to keep an eye on potential fraudulent activity, but there are other things you can do throughout the year to protect yourself from fraud. Here are a few tips from Experian for protecting yourself from potential fraud and identity theft:
- Review your credit statements every month and monitor your credit report.
- Take care of cards by carrying only the ones you need in your wallet.
- Shred statements and receipts that have your account number on them, as well as any credit offers you receive in the mail.
Also, read Financial Security: Keeping your Info Safe for some tips from the CGS Team on making sure you are always covered and protected.
While the steps above are simple in theory, they do need to be acted upon consistently. Having a good credit score comes with a range of benefits, so avoid doing yourself a disservice and always stay on top of your credit! Are there any mistakes you’ve made with credit in the past? What has worked for you when building your credit history? Share your tips and experiences with other CGS readers by leaving a comment below!
1 thought on “How to Build Good Credit in 6 Simple Steps”
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