When it comes to credit, everyone starts out with a blank slate. You then have an opportunity to raise your score over time and improve your financial future.
But how do you get started? Or, what if you have credit and made a few mistakes? Here are the basics for building (or rebuilding) your credit:
How to build credit from scratch
If you don't have a credit history, you might be asking, “How can a beginner build credit?” Some ways to establish credit and get started on the right foot include:
• Get a secured credit card — Secured credit cards can be a safe and reliable way to build credit. You start by depositing a certain amount of money with a card issuer in exchange for a credit card with a credit limit equal to your deposit. You then use your card to pay for groceries or other necessities and always pay the bill in full and on time. There may be fees involved with some secured credit cards, so do some research before making a final selection.
• Get a store credit card — Does one of your favorite retailers offer a store credit card? Signing up for one could help you build credit and also save money through discounts and promotions. Be aware that some retailers may charge high interest. Try to keep your balance low or pay it off every month.
• Take out a small loan — Credit cards aren’t the only way to build credit. If you take out a small loan and make payments on time and in full, you could boost your score. Plus, since credit cards (revolving credit) and loans (installment credit) are different types of credit, adding a different type of credit to your report could give your score a bump.
How to build credit responsibly
Once you start building credit, it’s important to establish good habits. Here are a few suggestions:
• Don’t miss a payment — Late payments can stay on your credit reports for up-to 7 years and wreck your credit. It is important to make each payment on time, even if you can only afford the minimum payment.
• Keep your balances low — While you might be excited about breaking in your new credit card, try not to use more than 30 percent of your available credit. That means if you have a $1,000 credit limit, try not to spend more than $300. Keeping your credit utilization rate low can help improve your overall credit health.
• Avoid paying interest — Keeping a card active is important, but you don’t need to carry a balance to build credit1. Consider paying off your entire balance, or most of it, each month to avoid interest charges.
Ways to protect credit
Bad credit can happen to good people. If you’re looking for a way to rebuild your score, try these tips:
• Pay down debt — Make a plan to chop away your total debt. The lower your overall debt, the higher your credit score can go. Check out these easy ways to start paying off debt for ideas.
• Check your credit report and dispute any errors — Incorrect information can lower your credit score. Check all three major credit reports to make sure everything is correct. If you find any mistakes, follow these steps to dispute the errors.
• Talk to your creditors — If you suddenly find yourself unable to keep up with payments, contact your creditors right away. Not only will some creditors be willing to work with you, but you might also agree on a new arrangement that benefits both of you.
Stay the course
Building or rebuilding your credit can give you a leg up on financial opportunities today and in the future. Once you start to see your score go up, keep doing what you’re doing!
1. DeNicola, Louis. “Is carrying a credit card balance good or bad?” CreditKarma.com. https://www.creditkarma.com/credit-cards/i/carrying-a-balance-good-or-bad/ (accessed September 25, 2018).
*This article has been updated from its original posting on January 1, 2014.
Mitch Strohm contributed to this article.