Building a great credit score from scratch
By Justin Boyle
You've likely known that credit scores are important since long before you got your first credit card. But when you're just starting out in the world of credit, learning how to create a strong credit score can be tricky.
Credit cards can offer the key to beginning your credit history on the right foot, but only if you use them smartly. The guidelines below can help you use your credit cards to begin establishing a great credit score from the start.
Using credit cards to boost your credit score
You must begin using credit to establish your credit score, which for many means applying for a credit card. Once you have that new card, these tips can help you craft good credit that will last a lifetime:
- Create a strong credit history. If you've never had a credit card before, you'll probably be limited to card options with a fairly high APR. With high-interest cards, it's wise to stick to small purchases and pay your balance off before the end of each billing cycle. This will help you save on interest and show lending agencies that you can handle the responsibility that comes with spending on credit.
- Consider owning a few cards. After using your first card to make some responsible purchases, lower APR offers may start coming in the mail. Use these new offers as an opportunity to expand your credit portfolio and show that you're responsible enough to maintain multiple accounts without making a late payment. Some personal finance gurus say that between four and seven cards is the "sweet spot" that can help your credit score go up the fastest, but it's wise to acquire these cards over time (as I'll explain later).
- Stay well below your credit limit. If the balances on your credit cards start edging up toward their limits, the rise in your credit score will slow down or even reverse. If you're ready to try a big-ticket credit purchase, it's smartest to wait until you have a lower APR and your spending limit reaches to at least twice the cost of the item you're looking to buy. That can help you continue increasing your score without risking huge amounts of interest in case you can't pay your full balance in one payment.
Most credit experts will tell you that the most important tip for a strong credit score is to always pay your bills on time. Even one late payment can cancel out the gains from several months of responsible habits.
Avoiding a pitfall of credit applications
It's important to note that one of the ways to increase your score can sometimes push it in the opposite direction. Sound complicated? It's actually pretty simple.
When you apply for new lines of credit, you're giving a lending agency permission to pull your credit report. Every report requested can ding your score slightly, and that effect compounds with each new credit application.
So how are you supposed to increase that all-important score if what you do to raise it could also bring it down? The answer is simple: Have patience.
The hit you'll take from new credit factors into your score less than the boost you get from responsible credit use. On top of that, you get an extra lift to your score from having a long credit history. As you continue to manage your credit responsibly, those occassional new credit applications will factor less and less into the overall equation.
What's more, a diverse credit portfolio also helps increase your score. If you're in a place where you can apply for a mortgage or auto loan in addition to your credit card, you may add even more positive factors to your lending history.
It comes down to your reputation
Patience is a key virtue when it comes to building a strong credit score. Your credit score is a measure of your reputation as a borrower, and it isn't going to change overnight.
So stay smart, watch your spending limits and pay all of your bills on time. By doing so, your credit could go from non-existent to outstanding in just a few short years.
Justin Boyle is a writer and journalist in Austin, Texas.