How To Build Your Credit When Just Starting Out
There is a big misconception among many young people, especially those coming out of college. That is the belief that the only thing that matters is what you do after you get your credit card, not before. That is a terrible misconception that even prevents some from getting a line of credit. Building credit is the act of managing your finances correctly, even if you donít have a credit card. This includes paying your bills on time, your loans, purchases youíve made, etc.
Letís discuss first the implications of paying bills on time. Even before you apply for a line of credit, ensure that you pay all your bills on time. Took out a student loan? Try to make consistent payments. Student loans are tricky, as a lot of people struggle with them, but it is still important that you pay your dues to Sallie Mae on time. There is also the matter of utility bills that a lot of younger people like to leave for last when revenue comes in. Ensure that when money comes in, bills are the first thing taken care of. Late payments and disconnections will be taken into your account.
In the process of building your credit, ensure that you keep your credit card debt low. The recommended ratio of debt balance to credit limit should not exceed 30%, so ensure that you limit your spending to only what is needed, and make frequent and consistent payments. However, do not take this as to say that you will stop using your credit card altogether. If your card is unused over a period of time, then your bank may close that account, which raises your credit utilization. Also, try to stick to only one credit card when you are just starting to build your credit score, as opening too many accounts at once will lower it.
Next up is to educate yourself on how credit scores are calculated and reported. Once you know this, you will be making much wiser decisions with your credit card. Once a year, you can pull your credit reports for free from sites like annualcreditreport.com. Sites like this pull reports from the three credit bureaus: Equifax, Experian, and TransUnion. Ensure that your credit reports do not contain any errors, and if you spot any, contact your issuer and the relevant agencies immediately. Ensure that you can back up your claims of any errors, so ensure that you have a good history of paid bills and receipts stashed away somewhere. The credit reports that you pull may not contain your score, but you may be able to get it from your issuers, or even places you got your loans, such as Sallie Mae.
Finally, when getting a credit card for the first time, look to see if you can get a secured credit card. Even though this option is not for everyone, this will ensure that you consistently have a high score. Secured credit cards are issued with a cash deposit that is equal to your credit limit. This might look like a silly option at first glance, but note that the deposit only acts as collateral, so it is not a prepaid debit card. Once youíve built a nice credit score with this, then you can move on to unsecured cards.