How to Build Good Credit (The Right Way)
Welcome to the real world, where the majority of your financial life will be dictated by a three digit number…? You thought report cards ended at graduation, but adulthood comes with a grading scale: your credit score. Want to buy a new car? Having a good credit score will allow you to get a better car loan. Is it time to buy a house or an apartment?
A bad credit score may halt your home-buying dreams. Even renting requires a credit check. Whether you’ve just started college or you’re entering the workforce, you’ll have to start somewhere. Building good credit from a clean slate is pretty easy–maintaining (or worse, repairing) your credit score is difficult.
Whenever you apply for a line of credit, be it a new card or a new car, lenders will check your credit score. There are a few types of credit scores out there, but you need to pay attention to your FICO score. 90% of lenders look at your FICO score over any other report. Your FICO credit score grades your credit history based on a number of factors (and a complicated formula).
The length of your credit history, the different types of credit you have, and any recent lines of credit make up 35% of your FICO score; another 35% consists of your payment history, and the amount of debt makes up the last 30%.
A good credit score starts with a 700; a so-so score is in the 600s (the closer you are to 700 the better). Anything under a 600 is considered a bad credit score. When you apply for a credit card, there many things to consider. You should be primarily concerned with the card’s annual percentage rate, or APR. If your credit card has an APR of 16% (which is a great rate), you’ll divide the annual rate by 12 to determine the amount of interest you’ll pay per month: in this example, you’ll pay 1.33% each month.
Are you going to pay off your card every month? Then you won’t be as concerned with APR as someone who can only pay a portion of the balance. When you’re carrying a high balance on your credit card, the interest accumulates fast. Phew. Are you still awake? Now that the mini-lesson is over, let’s get to the good stuff.
The Easy Way
Shopaholics Need Not Apply
Applying for a retail credit card is like playing with fire. On one hand, retail credit cards are incredibly easy for credit-less young adults to obtain. However, with APRs reaching 27.99%, retail credit cards have the highest interest rates around. In the right wallet, a retail card can be used as a gateway to lower-interest cards with better benefits.
When I was 19, I applied for a GapCard on a whim. I had no credit history and was doing it solely for the discount. To my surprise, I was approved and granted a $300 credit limit. Even though my parents were worried I would wreck my credit and have debtors on my back, I used this card responsibly. Over the following six months, I was able to create a credit score above 700 and a new wardrobe–and when an offer from Discover came in the mail, I was approved for a “legit” credit card.
The Student Credit Card
Sweet, yet Slightly Out of Reach
Before I got my GapCard, I gave the student-focused Discover It card a shot. With no credit history and a measly part-time income from Hollister, I was swiftly denied. After months of timely credit card payments and a shiny new credit score, I reapplied and was approved.
Student credit cards have stricter approval standards, but are ultimately the way to go if you’re in college. The benefits are actually helpful: many offer 0% APR for the first year, then offer a low interest rate, often lower than 20%.
Rewards come in the form of cash back, gift cards, or can be used to pay off your balance–which isn’t as fun as in-store discounts and retailer gift certificates, but it doesn’t enable your shopping addiction like retail card rewards do. Unlike a full-blown “grown-up” card, student cards don’t tend to have an annual fee.
The Secured Credit Card
A Safe Way to Repair Your Credit
Secured credit cards are a great way for people with bad credit or no credit to build a good score. Compared to retail and student credit cards, secured cards have looser approval requirements.The APR typically sits at a nice middle ground between retail cards and student cards, and although these typically have an annual fee, they may be your only option.
Are you trying to recover from relying on credit cards? If you’re carrying a wounded credit score, you should look into applying for a secured credit card. Offered by most banks, these alternatives allow you to open a line of credit by putting down a cash deposit of a few hundred dollars.
Let’s say you open an account with a $300 to $500 deposit. As long as you make your monthly payments over a course of a year, you will get your cash deposit back and a full-fledged line of credit. And in some cases, the banks will allow your deposit to grow interest; you’ll get your deposit back and then some!
So you have a credit card. Now what?
There are tons of finance blogs that will give you advice on how to maintain your good credit, but I promise I won’t bore you any longer. My parting pieces of wisdom are simple: never miss a payment, pay more than the minimum, and always check your credit score. You may not be able to pay off your card every month, but do the best you can.
Missing a payment will lead to late penalties and a potential APR increase. Minimum payments keep you in the clear, but don’t do much to fight the interest growing on your balance. Even if you’re throwing an extra ten bucks on top of the mandatory minimum payment, try to pay as much as possible at the end of the month.