Building Credibility with Credit Cards
Building a strong credit history is the key to having a high credit score, which will impact many aspects of your life. Most people know that having a good credit score means getting easier approval and lower rates on credit cards and loans of all types. However, many people, especially younger ones, do not know what it takes to build (or rebuild) their credit history in order to get a better score. Young adults, in college or living with parental assistance, often do not realize the importance and benefit of building a good credit history as early as possible. This article will detail what makes up a good credit history and how to build one.
A credit history, and therefore score rating, is generally based on five components. These are new credit, types of credit, amount owed, payment history and length of history. Managing each point will help you build a strong credit history.
“New credit” means looking at any accounts or credit inquiries that have been opened recently. The best way to manage this is to avoid applying for many loans or credit cards all at once. Having many items indicates that you are taking on too much debt and may be a greater risk. For example, a new college student may have student loans and a single credit card. But opening many credit cards at once could raise a red flag and will lower your score. If you want to start building your credit history, the best way is to take out a single credit card. If you already have a poor credit history, and cannot get approved for regular cards, consider getting a secured credit card. With a secured card, you deposit the amount of your credit limit beforehand, so there is no risk to the creditor.
“Types of credit” refers to the different forms of credit that may be extended to you, of which there are two main types. This includes loans such as student, car or home as well as revolving accounts such as credit cards, store/gas cards, etc. Having a mix of several accounts in each category shows that you are able to manage your credit better than having just one type, like credit card debt. This generally comes naturally, as you progress in life with student loans, car loans, and eventually mortgage/home loans.
“Amount owed” is the total amount of debt that you have, including loans and credit card balances. The calculation also takes into account how much debt you have compared to your total credit limit. For this reason, it is generally good to maintain low balances on your credit cards. Advice varies, but the general rule is to have below 30% credit utilization. For example, on a credit card with a $10,000 limit, keep the balance no more than $3,000. While it is best to have zero balance every month by paying in full to avoid finance charges, maintaining a small balance shows that you are utilizing your credit and may lead to a better score.
“Payment history” is the record of on-time payments for all types of credit accounts. This component is based on the amount of any late/missed payments, how long ago and how many times it occurred. The best way to avoid problems here is to simply make all payments on time for the full amount owed (at least the minimum on credit cards). This demonstrates that you are able to use your current credit responsibly.
Since this is the most important factor in your credit score, you need to make sure that you are diligent with payments every month to build a good credit history.
Finally, “length of credit” refers to how long you have had a credit history as well as how long you have had specific accounts. This factor is why it is very important for young adults to start building their credit when they first turn 18. This is also why it is not advised to close an old account that is not being used much anymore. Even with a perfect record of on-time payments on a variety of accounts, young people will not be able to have the highest credit score possible. This is simply because they have not had a long enough history for that rating. An account open for less than 3 years is considered short, while one open for over 40 years is best.
Building a strong credit history boils down to living responsibly, and can be summarized in a few easy steps. Start early, by taking out a credit card. Make all payments on time. Only take out new loans or credit cards when you need them – do not apply frivolously. By following these steps over a number of years, you will eventually have a strong credit history and the high credit score to match.
- Understanding Credit:
