If there’s one thing that can stand in the way of getting approved for a loan, it’s bad credit. Whether you want to take out an auto loan, personal loan, or even a mortgage, good credit is a necessity. Building good credit should be done from the ground up. The moment you take out your first credit account, every financial move you make will become a part of your credit history. Knowing how to build a good credit score is crucial to overall financial health.
So, what does it take to build good credit? If you’re wondering how to build good credit, here are some best practices to adopt that will help open up the doors to loan and credit products in the future.
1. Get Yourself a Secured Credit Card
Probably the best way to start building good credit is by taking out a secured credit card. If you’ve got no credit to your name, you might find it tough to get approved for a traditional credit card, or any other type of credit account. To work around this, you can get yourself a secured card that will allow you to spend money on plastic without much credit at all.
Are you wondering how to build a good credit score with a secured credit card?
To use these cards, you’ll have to make a deposit for a certain amount, which then becomes your credit limit. Basically, you’re only able to spend what you’ve already paid into the card. When you use this card responsibly – which means making your payments on time and in full each month – you should be able to build a decent score within as little as six months.
2. Borrow Only What You Can Afford
Sounds pretty obvious, right? It is, but it’s worth mentioning anyway. A lot of people have gotten themselves into a huge pile of debt that they struggle to climb out of simply because they spend more than they can actually afford. That’s easy to do when you have a credit card in your hand and don’t have to use cash to shop. But if you’re not disciplined with your spending habits, you can easily wind up in a pile of debt.
Not only that but spending more than you earn will negatively impact your credit rating, which is the opposite of what you’re trying to achieve. Instead, what you should be doing is taking a good look at what you bring in each month and establish a workable budget. Once you’ve crunched all the numbers, you’ll know exactly how much you can spend every month and comfortably make payments when the bills come in. By paying off your bills on time and in full each month, building good credit should come easy.
3. Use Only a Fraction of Your Credit Limit
When you get a credit card, you’ll be given a credit limit that you are technically allowed to spend. For instance, a credit limit of $5,000 means you have $5,000 to spend on your credit card. However, maxing out on your credit card is the last thing you want to do if building good credit is on your agenda.
It’s called “credit utilization,” which basically refers to the amount of money that you spend relative to your credit limit. Spending up to your credit limit can negatively impact your credit score. On the other hand, using only a portion of your credit limit can be good for your score. A good rule of thumb is to use no more than 30% of your credit limit, or less if possible.
4. Don’t Open Too Many Credit Accounts
Getting a credit card definitely makes the list of good ways to build credit. But it’s important to use restraint.
It can be exciting to get your first credit card. Having the freedom and flexibility to use plastic to pay for all of your goodies is very convenient, and all the points and perks that you can get with each expenditure can put money back in your pocket. But don’t make the mistake of opening up too many credit cards in a short period of time. You might get a ton of offers to open credit cards at all of your favorite stores, but don’t let the temptation get the better of you.
Opening too many accounts can be bad for your credit rating. In fact, 10% of your credit rating is weighted on how many accounts you open up. More specifically, your credit score looks at the number of new accounts you’ve applied for recently and the last time you opened a new account.
Why does the number of credit accounts matter? Well, every time you apply for new credit, lenders do a hard inquiry to check your credit information. Every hard inquiry causes a small dip in your credit score. So the more accounts you open up, the more hard inquiries will be done, which means the more your credit score will decline.
Based on this, you’d be better off just sticking with one credit card and resisting the urge to open up a bunch of them just to collect points from some of your favorite places to shop.
5. Pay Your Bills on Time
The factor that plays the most important role in calculating your credit score is your payment history. More specifically, 35% of your credit score depends on your past payment behaviors.
Building good credit relies heavily on paying your bills on time. As your bills start trickling in every month, don’t leave them piled up on your kitchen table in hopes that they’ll somehow magically disappear. Even just a few days late can mean a ding to your credit score. And the later your payments are, the worse off your credit score will be.
What’s worse, you could wind up in collections if your bills are more than 60 days past due. This will be marked on your credit report, and not only will it cause your credit score to drop, it will also flag future lenders that you’re not a safe bet to make. In this case, you could find yourself having a tough time getting approved for a loan of any type.
If you want to improve or build a good credit score, make sure every bill you get is paid before the due date.
6. Pay Your Bills in Full
Your ability to pay all of your bills in full is part of your payment history. Not only should your payments be timely, but they should also be made in full as well. Of course, you can always make minimum payments in order to make sure your bills are considered to be paid on time, but this does little to help build a strong credit score.
If you are only spending what you can afford, there should be no reason why you can’t pay off your entire balance every month. Not only will paying the full amount help build a strong credit score, it will also help you avoid accumulating a balance that may be really tough to pay down.
7. Keep Old Accounts Open
If you’re just starting to build credit, you likely don’t have any credit accounts that have been around very long, if any at all. But if you do, let them age. Old accounts contribute to building credit scores. Without them, lenders won’t have anything to go on when they assess your ability to make bill payments on time and in full.
When you do open a credit account or two, keep them open for a long time. Make expenditures on these accounts once in a while to keep them active, and make sure to pay off the balance at each billing cycle. Of course, a short credit history can be fine too, as long as you don’t owe a lot and make your payments on time.
Final Thoughts On Building Good Credit
There are plenty of good ways to build credit. When considering how to build a good credit score, start with small steps. Building good credit is really just a matter of being disciplined and dedicated enough to make it happen. All of the above-mentioned tactics are simple enough – you just need to put them into practice to help you establish good credit and keep it that way for the long haul.