Whether you’re building credit for the first time or working on improving your score these tips can help you manifest your goals. Good credit is the golden ticket for securing low-interest loans, credit cards, and access to rental properties. Once you’ve established a strong score, you’ll need to work on maintaining it but eventually that hard work will pay off.
Credit reports are managed by Experian, Transunion, and Equifax. These credit bureaus monitor the data supplied by your lenders which includes your current or past debts, payment history, and residential portfolio. Understanding how to navigate these factors will allow you to better control your score and ultimately reach financial security.
1. Become an Authorized User or Find a Co-Signer
If you’re starting from scratch you can ask someone to make you an authorized user on their card. Gaining access to their account will bolster your score —even if you never use the card. Keep in mind that this is a two-way street, and just as you can benefit from someone else’s good credit, you can also see your score drop if they mismanage their finances.
Alternatively, if you’re looking to open your first account you can ask someone to co-sign on your application. This may allow you access to cards with better interest rates, but be wary that your co-signer will be on the hook for any debt you accrue.
2. Apply For Your First Credit Card
If you’re ready to tackle the application process on your own there are shortcuts for people with very little or no credit history. The first option is to find a secured card. These cards typically require a security deposit and only allow you to spend the money you’ve already deposited in your account.
Secured cards are easy to qualify for and a great tool for building credit. You can use them to maintain a low or zero balance, and practice making timely payments. Some lenders will even let you convert a secured account to a regular credit card after a trial period.
Otherwise, if you have some established credit you can likely apply for an unsecured card. Try to find one with a low spending limit, and make small charges that you can easily pay off. This responsible use will quickly build your score and lead to better card options in the future.
3. Maintain Your Account
Making small “micropayments” throughout the month will help your score. Your goal should be to keep your balance near zero and never miss a monthly payment. This will improve your credit utilization, which is the amount of available credit you have at any given time.
Your payment history has by far the biggest weight on your score and missed payments can affect your numbers for up to 7 years. If you miss monthly payments your account will be labeled as “delinquent,” and if it’s been more than 30 days since your billing date you should call your creditor to settle out immediately.
4. Grow Over Time
Once you’ve seen some improvement in your score you may be tempted to close your first account. Be careful because canceling any card will lower your credit utilization and the overall longevity of your accounts. Another option is to request a credit line increase which will raise your overall limit on any card. This will raise your credit utilization, and approval for this step will bolster your portfolio.
Conversely, if you eventually receive a credit report with false, damaging information you can dispute the error. These mistakes may look like a wrongfully labeled late payment, or the use of negative information that is too old to be considered relevant. From the time of your dispute the credit bureaus have 30 days to look into the error, so make sure to carefully keep track of any changes to your score.
5. Diversify Your Portfolio
Credit cards are known as revolving credit. This just means that you choose how much you want to pay by choosing how much you want to spend. Once you’ve gotten the hang of this you may look into opening an installment account, which requires equal payments for a set time.
An easy option is to apply for a secured loan. This type of loan is great for applicants with no credit history and simply requires collateral for the amount of money borrowed. Many people borrow against their car or savings account in order to secure the cash offered. The main drawback of this plan is that these loans will require you to pay interest on the amount you borrow, but they can really help you improve your credit score.
Other types of installment loans include mortgages and car loans, which you can gear up towards by maintaining a positive payment history now. Even small secured loans typically have a life span of several months to years, so it’s important to open one as soon as possible.
6. Watch Out For These Pitfalls
The major mistake first-time credit card users make is opening an account with too high of a spending limit. It’s good to aim for an amount of debt no higher than 43% of your total income and be wary of any large limit offered to you as a first-time borrower. These cards may come with a high-interest rate that doesn’t kick in until you’ve used your account for several months, and if you’ve accrued too much debt they could be your downfall.
Make sure to budget your expenses and only spend what you know can pay back on your card. Review your credit report and statements often to watch out for potential fraud, and familiarize yourself with what hurts and helps your score. Most importantly, shop around before you take out a loan or credit card because only you know what will truly work for you. You’ll want to find a deal that offers low-interest rates, fees, and service charges. Once you have go ahead and apply.
Buckle up, and start your credit journey with SEI Credit Union. We have many checking, savings, and loan options that can accommodate all kinds of customers