Bad credit can keep you from buying a home, financing your education, and even getting a job. This is why it's so important to build good credit as early as possible.
Starting with your first credit card, everything you do that involves credit becomes part of your credit history. Using credit responsibly is a must if you intend to build and maintain a good credit history.
Only Borrow What You Can Afford
A credit card isn't a permission slip to buy things you can't afford. Overusing a credit card is the quickest way to get into debt and credit trouble.
The best way to build good credit is to create the habit of charging only what you can afford. This habit lets future lenders and creditors know you're a responsible borrower. You'll find it easier to borrow money and get new credit when you show that you have the discipline to borrow only what you can afford to repay. Not only that, only charging what you can afford helps you avoid excessive debt.
The same rules applies to loans. Regardless of what the lender says you qualify for, you should only borrow what you can pay back. Before you shop for a loan, review your budget to see what monthly payment you can afford. Make sure your loan payment doesn't exceed the amount you've come up with.
Use Only a Small Amount of the Credit You Have Available
Maxing out your credit cards—or even coming close—is irresponsible, particularly if you don't plan to pay the whole balance off within the month. Lenders know that borrowers who max out their cards often have difficulty repaying what they've borrowed.
Your credit score also suffers when you run up big credit card balances and don't pay them off. Keeping your balance at a small percentage relative to your credit limit is best for building good credit.
If you charge a high balance on your credit card, pay the full balance before the account statement closing date to prevent having a high balance listed on your credit report and used for calculating your credit score.
Start With Only One Credit Card
It's easy as a first-time credit card user to accumulate a collection of credit cards within just the first few years of using credit. Be careful not to make the mistake of opening up too many credit cards too soon. The more credit you have, the more you'll end up using and the harder it will be to keep up with your balances and payments.
Too many inquiries into your credit and too many new credit cards can negatively affect your credit score. Credit inquiries count for 10% of your credit score and opening new credit cards lowers your average credit age, a factor that's also 10% of your credit score.
Spend time learning to be responsible with credit, and apply for new credit cards sparingly.
Pay Your Credit Card Balance in Full
If you're only charging what you can afford to pay, paying off your full balance each month won't be a problem. Paying off your balance each month shows that you're capable of paying bills, something creditors and lenders want to see. Since a large part of your credit score is based on the timeliness of your payments, paying your balances on time improves your credit.
Paying your full balance each month also helps you avoid racking up credit card debt.
Make All Your Payments on Time
Not all of your monthly payments are listed on your credit report. Bills that aren't regularly reported to the credit bureaus won't affect your credit as long as you're paying on time. However, any bill can potentially wind up on your credit report if you become delinquent and the account is sent to a third-party collection agency.
Prevent negative accounts from being added to your credit report to build a good credit score. A serious delinquency like a debt collection can be hard to overcome.
If You Carry a Balance, Do It the Right Way
Having a credit card balance isn't necessarily bad as long as you pay more than the minimum each month to pay off your balance as quickly as possible. Avoid making late credit card payments and continue to keep your balance at a reasonable level (below 30% of the credit limit) to maintain a good credit score.
Let Your Accounts Age
The longer you've had credit, the better it is for your credit score. Leave your oldest accounts open since they help increase your credit age and build good credit.
Closing an old account won't remove it from your credit report immediately, but after several years, the credit bureaus will eventually drop old, closed accounts from your credit report.
Frequently Asked Questions (FAQs)
What is a good credit score?
Credit scores range from 300 to 850; the higher the number, the easier it will be to get approved for a credit card, mortgage, or other loans at a low interest rate. Often, a score above 670 is considered good, while a score above 760 is considered very good. A score of 800 or higher is excellent.
How long does it take to build good credit?
Building good credit is an ongoing process. If you find errors on your credit report, correcting them will likely improve your credit score once the changes are made. However, this process can sometimes take weeks or months. If you are waiting for negative items to fall off your credit report, that can take several years. The fastest way to build your credit score is to pay off a large outstanding debt, such as a credit card balance.