Starting you credit history is the perfect opportunity to begin good spending habits. With over 45 million Americans you are not alone in this pursuit, and there is a method to the madness. There is so much information out there it may be hard to decide where to begin, but after a little research you will see a distinct pattern that you can follow to get you started on your credit score journey.
Avoid Getting a Major Credit Card at First
If you don’t have a credit score yet, you’ll only be rejected if you try to apply for a major credit card company card such as those from Chase, Citibank, Bank of America, Discover, or American Express. The reason it is important not to apply is that if you do apply and get rejected, then you will simply have a credit score that shows you were rejected for credit rather than accepted which is a bad thing when you’re trying to apply for new credit.
It is better for your credit score not to apply at all for a card than to apply for one you are not qualified for and get rejected.
Begin by Applying for a Secured Credit Card
Your first credit card should be a secured card. A secured credit card is essentially another form of debit card, but with the very crucial difference that it actually builds a credit history, while a debit card does not. This allows you to build a credit score from scratch while not exposing the credit card company to any risk. This is why they’re able to take you on without a credit score. Essentially, you’re required to put down a deposit, which usually becomes your credit limit. Many of these cards have very low minimum deposit limits.
You can then increase your credit limit gradually over time, while you build your payment history. After a while you’ll have a sufficient payment history which will give you a credit score that will gradually improve, as long as you pay all of your bills on time.
It’s important to note that many of these cards will have an annual fee. This is not ideal, but is essentially a “necessary evil” that you may need to deal with for a little while as you build your credit score. Eventually, you can move on to other credit cards that do not have an annual fee if you’d like.
It Is Crucial That You Pay Your Bills on Time
Once you begin to use your new secured credit card, make sure that you pay each bill on time. This is important because you do not want to establish a history of late payment, as that will damage your credit score. After all, building a good credit score was the whole point of this exercise in the first place!
Another common mistake that people may make is not using the card enough. It’s important that you establish a history of using the card and paying it off each month, so that creditors can tell that you are responsible with your finances.
A good way to do this is to simply use the card for recurring monthly expenses, such as gas, groceries, or subscriptions. You’re ideally looking for things that have a predictable, fixed cost each month that fit well within your credit limit. Then you simply pay that balance off each month in full before the due date.
You will need to repeat this for about six months to a year in order to build a decent credit score and move on to the next step.
Applying For Your First Major Credit Card
After following this routine for approximately one year, it should become safe to apply for a major credit card. You can use sites like creditkarma.com to help check your approval odds before you apply. Again, remember not to aim too high by trying to apply for a card you are not qualified to have.
Your first major credit card will probably be one with a fairly low credit limit and a high interest rate. This is normal, as credit card companies won’t necessarily want to take a huge risk on you at first. Having one of these major credit cards on your report is great for your credit score and will help to build it further. But remember, it still important that you pay your bill on time, as missed or late payments on a major credit card will do serious damage to your credit score.
Stick with It!
Once you have that major credit card it may be tempting to lose focus. It’s important that you develop healthy spending habits, and keep paying your credit card bill on time each month, before the due date. It’s also important not to rack up or ever max out your credit card limit, as using too much of your credit limit also damages your credit score. As a rule of thumb, you don’t want to use more than 30% of your total credit limit on any given card if you can.
Credit card companies know that the more outstanding debt you have, the less likely you are to be able to make your payments on time. Credit card companies want to minimize their exposure to risk and prefer users who keep their debt under control and make each and every one of their payments on time.