Creating Your Credit Score From Scratch: Do’s and Don'ts
For those of us who are just starting to think about credit, don’t worry. You don’t have to be wandering around in the dark.
Creating credit is about more than just getting your first credit card. You also have to use it responsibly. We want to make the steps you need to build your credit from scratch transparent and simple. Here are a few Do’s and Don’ts to help you achieve your credit goals:
DO start with only one credit card.
Slow your roll! You have to show lenders that you’re responsible with credit before you can ask for more. Additionally, new cards lower the average age of your credit history which is factored into your credit score. Plus, every time you apply for a new credit card (regardless of whether you are approved or not), it counts as a hard inquiry which lowers your credit score.
DO put your card to use.
Don’t let your card collect dust! It’s not beneficial for your credit score to just have a credit card. Payment history is a huge factor into your credit score. If you’re a little nervous about using your credit card, that’s understandable. Try starting off with small consistent purchases to test out the waters.
DO only use what you can afford.
Keep track of your purchases and balances so that you don’t max out your card. By living above your income, it becomes harder to pay off the debt you accumulated. You can avoid debt and paying interest fees by budgeting yourself and only using your card for purchases you would regularly make such as groceries, rent, and utility bills.
MoCaFi Tip: The closer you are to maxing out your credit card, the worse it looks to creditors. Try setting a goal to only use about 30% of your credit limit. This way it shows that you are actively using your credit card, but you aren’t at risk of accruing more debt than you can financially handle.
DON’T miss your payment deadline.
Sometimes life gets in the way and we end up having to pay off our balances in installments. That’s okay, just make sure that you keep track of the deadline each month and pay off at least the minimum balance.
MoCaFi Tip: Paying your other bills on time is important too. Late payments on your rent and other utilities can negatively impact your credit score because the companies in charge of your utility bills can report it to the credit bureaus.
DO apply for a student credit card.
Some financial institutions offered credit cards specifically for college students. These cards may include lower credit limits, lower interest rates, and more rewards points such as cash back or discounts on purchases.
DON’T co-sign for your friends.
Your friend could be the most trustworthy, responsible person you know, but the moment they miss a payment or max out their credit card, that reflects poorly on your credit score. Save your friendship and your credit score by choosing not to co-sign for your friend.
Regardless of whether you are in college, just out of college, or a little late to the game, now is the time to build up your credit score. By following these healthy habits you are putting yourself on the right track to financial success.