Maneuvering through websites full of financial jargon and credit card advertisements is enough to give anyone a headache. You can be 10 pages deep into Google and still not have a clear idea of what to do and not to do when it comes to building credit.
The single most important factor in your credit score is your ability to pay money back on time.
Do you need me to say it louder for the people in the back?
When you receive any sort of bill, pay it in full and on time. I don’t care if it’s for your credit card, phone, utilities, or student loans; these are all directly tied to your credit score. This is adulthood and you need to be paying your bills in full, all of them. Partially paying a bill only hurts you in the long run. You’ll tack on a late fee, compounding interest, and your credit score will take a hit.
The second most important factor is your credit utilization.
This is the amount of credit you use vs. the amount available to you. It’s ideal to keep this under 30%.
Ex: You have a credit card with a $2,000 limit, you shouldn’t have a balance over a $600 in any given month.
However, the lower this number is, the better off you’ll be.
For beginners, I suggest closely monitoring your spending to make sure your utilization stays low. It takes some time to get used to calculating your funds when the credit card bill doesn’t come till a month after your purchases are made. My rule of thumb is to treat your credit card like a debit card. If you don’t have the money in your bank account to cover the purchase, you shouldn’t be making that particular purchase on your credit card anyway. You wouldn’t overdraft your bank account with your debit card, so why would you use your credit card any differently?
Once you get the hang of that, you could look into opening another line of credit. Opening another card will increase your credit limit, therefore lowering your utilization.
For example, I have two cards I use frequently. One offers 2x points on all purchases, the other offers 3x points on dining and travel and 1x points on everything else. My spending habits don’t change, but I alternate cards based on the better rewards for the purchase I’m making.
You should also never ever max out a card. Meaning if you have a $2,000 limit, you spend $2,000 in one billing cycle. This is awful for your utilization and subsequently, your credit score.
Other factors weighing in include your length of credit history. There’s not much you can do about this except open a line of credit and practice your loyalty. I opened my first credit card when I was 19. So even at the ripe age of 24, that’s still only 5 years of credit history. Lenders don’t like this.
The best advice I can give you is open a credit card and plan to use it forever and ever. The card I opened at 19 is almost useless when it comes to rewards and benefits, but my score drops if I close it. I pay my parking tickets on it just to keep the card active and ignore it otherwise.
Your types of credit are also factored into your credit score. Mortgage lenders especially look at this when you’re looking to buy a home. Your home loan will most likely be the largest amount of money you ever borrow, and banks like to see that you know what to do when it comes to monthly payments.
The good news is, if you’re anything like me, you’re probably sitting on a student loan. If it’s solely in your name (your parents didn’t co-sign) your monthly payments will help build your credit score.
The last factor is the number of opened credit lines vs. the amount of time passed. The general rule is 5/24. Building your credit score is a marathon, not a sprint. Lenders want to see that you’re taking things slowly and working up. Your credit score takes a small hit each time you open a new line of credit, but especially when you open more than 5 or so lines in 2 years. Credit card companies will often deny you if you’re over this 5/24 limit.
Even if you’re frustrated with your current credit score, it’s important to take things slowly and build credit properly. Do your research and open up a credit card. Keep your utilization low and make extra sure you’re paying the bill each month in full and on time. It’s 100% never a good idea to make just the minimum payment. Remember that building your credit score takes time and patience. We all start from the bottom, remember?
As always, the biggest thank you to Zack Mathis for the mad copy editing skills.