Whether you’re starting from scratch or recovering after a small Target credit card mishap, there’s always room for improvement when it comes to your credit score. The universal goal is to have the highest score possible. This will mean lower borrowing interest rates, being exempt from utility deposits, and more exclusive credit cards with better rewards.
For beginners looking to build a credit score from scratch, I recommend a secured credit card. This essentially acts like a prepaid gift card to help you learn the ins and outs of using credit. It’s best to choose a card with no annual fee. Your deposit will be based on your existing credit score. It’s likely that if you’re just starting out, your deposit will be equal to your limit. Most companies offer a limit of $200 to start and then gradually raise the limit when you continue to pay the card off each month. Remember to keep your utilization under 30% and you’ll be golden.
I was lucky enough for my dad to agree to cosign on a car loan with me. This means he trusted me enough to tie his credit score to mine for the length of the loan. If I missed a payment, his credit score took a hit. With a cosigned loan, you’re legally obligated to make your payments, but the borrowing interest rate you receive is correlated to the cosigner’s credit score. Be nice to your parents and ask if you can pretty please borrow their credit score. Repay them by making all your payments in full and on time. You’ll end up raising their score as well.
As a post-grad, I hope you have at least a fairly decent credit score that just needs a facelift. Maybe you’ve had a credit card or a student loan to get you started and now just need some tips to get you from good to excellent.
The number one piece of advice that I will always give you is that you need to be paying every single one of your bills in full and on time. If you can’t afford to purchase something, you shouldn’t be making that purchase. It’s as simple as that. If you pay a bill late, you’ll be hit with a late fee and compounding interest. Remember my Target credit card? I had to pay a few hundred dollars for my few bottles of champagne because I made a mistake. Don’t let this happen to you.
One mistake many make is opening up a large number of credit lines in a short period of time. It’s okay to open one or two lines per year, even three depending on your situation. But opening more than 5 lines of credit in 24 months tips lenders to think that you’re relying too heavily on credit and may be getting into debt. It’s the same concept of job hopping. Employers are wary of people who switch jobs every few months just as a lender would be cautious of letting you borrow if you’re opening too many lines of credit.
It’s also important to really research the cards you’re opening and think about the long-term effects. Your credit score decreases each time you close a credit card. If you don’t think this is a card that will benefit you for years to come, it might be best to think twice before applying.
For example, it may seem like a good idea to open a store credit card if you regularly shop there. The cashier might offer you a sign-up bonus and a certain percent off your first purchase. They’re trained to make it sound sexy. However, you should weigh these benefits against those offered by any other cards you already have open. If you don’t see yourself shopping at Kohl’s for the next 20 years, it may not be the best idea to open a line of credit with them.
I have an American Airlines card with a $59 annual fee. I’m not crazy about the rewards and it’s not my ideal card, but it allows me to have one free checked bag and priority boarding on all American Airlines flights. I opened this card years ago knowing it wouldn’t be my go-to, but decided to because my hometown exclusively only flies American and Delta. This card has allowed me to save approximately $700 on baggage fees in the last 3 years. The pros (free baggage) outweigh the cons (annual fee) in this case.
It’s important to remember that building a credit score, especially from the ground up, takes time and effort. Learn from my mistakes and be strategic about which lines of credit to open, keep your utilization low, and carefully make all your payments on time. By following these steps, you’ll go from fair to excellent in no time.
Special thanks to Zack Mathis for reminding me that I'm good at money, not grammar.