Build Your Credit Without Falling Into the Trap
Every day, bankers have to reject people seeking home or auto loans because they have bad credit. Either by missing payments, spending above their means, or simply not being wise with their credit cards, this sect of folks has let their credit scores slide. What might be more surprising, however, if that every day, bankers also have to reject established credit.
These are often the ‘responsible” young people who don’t want to fall into debt and have avoided it thus far in their lives by never getting involved with credit cards. Unfortunately, this way of thinking can hinder you later in life. After all, how can banks feel safe lending money to you when you’ve never proven that you will be responsible about paying it back?
There’s a fine line to walk between using credit cards to build your credit and accidentally falling into the credit trap, but you can manage it successfully as long as you plan abroad tells you they are inherently bad is likely referring to credit card debt and its associated interest rates rather than cards on the whole. In fact, credit cards can be great correctly. Unfortunately, the credit card companies will do up to you to spend wisely.
So when should you get your first credit card? The answer to that question depends on your personality and your maturity level. If you can handle it, the best time to get your first credit card and start building your personal credit is as soon as you turn 18. Once you can legally obtain a credit card, do it. Look for a card without any annual fee, and try to find one that offers some sort of rewards.
Whether it’s through airline miles, points, or cash back, research which free cards have the best rewards and apply for that one. Another option for many young people is to get a student credit card from your bank. Most banks offer some sort of student card that will have a low credit limit and no annual fee. Once you have been approved for and acquired your credit card, the real challenge starts.
Now it’s time to prove that you can use your card without going into debt. On a monthly basis, never spend more than you have the money to pay back. To repeat, when you first start using a credit card, the best way to safely use it is to pay off your entire balance every month.
Never let a month go by in which you say “I’ll just pay the minimum this month and plan on paying it off next month.” Not only will you start having to pay interest, but you will also find that this is a very hard cycle to reverse. If this even sounds like something you would be tempted to do, you probably aren’t ready for your first credit card. Put it off until the temptation isn’t there anymore. Once you have proven to yourself that you are going to be safe using a credit card, there are a few steps you can take with it to build your credit higher as time goes on.
First, never spend more than half of your credit limit per month. One of the most common reasons cited for a poor credit score is that revolving balances are too high in proportion to credit limits. Second, even though it may be tempting, try never to close your first credit card. You got one with no annual fee for a reason: the length of time your longest account has been open is what determines your credit length, and the longer, the better.
You can certainly open new cards as time goes on to be able to take advantage of the rewards and perks of different types of cards, but always keep that first card open and try to buy something on it at least once every six months. Third, once you know you can handle a credit card, try to open a store credit card sometime soon.
These cards, associated with stores like Kohls or Macy’s can only be used at the store, and the credit ratings bureaus like to see that you have one. Just make sure to pay it off every month as well. You will start seeing the benefits of building your credit almost immediately.
While annoying, the more junk mail you get from credit card companies, the more desirable you are likely becoming as a customer. Between using a credit card sensibly and always paying all your bills on time, you will find that when the time comes to get a mortgage loan, you will be much better off not only than those with bad credit, but also than those with no credit at all.