I've been reading several people's opinions on credit and credit cards lately and it’s quite disturbing (in my opinion!). Many of these have been on how you should never use a credit card and some have even gone as far to say you should not care about your credit score (gasp)
While I'm not condoning opening up lines of credit that are used irresponsibly, a good credit score can be an incredibly powerful thing.
My mom helped me get my first credit card when I was 16 and I bought gas once/month on it and paid it off in full to start building my credit (thanks mom for introducing me to establishing good credit!)
I took out loans for college and after graduation I took out my first car loan (which I aggressively paid off within the first 6 months of obtaining)
And although yes I still have some student loans left to pay off, I have been overpaying on them and wouldn't trade the experiences they gave me for anything (including meeting my best friends, having the time of my life, studying abroad, and meeting my now husband after obtaining my teaching license in grad school)
By using credit responsibly from a young age, I was able to buy a home on my own at the age of 27. This is not something I would have been able to do so easily without having had established a history of positive credit usage (and funding my Roth IRA starting at age 23)
Regardless of what you’ve heard, establishing credit and USING IT RESPONSIBLY is not a bad thing (key word: responsibly). Having a positive credit score can open the door to tons of opportunities including buying a car, home, and even starting a business. Below I outline the 6 steps to increasing your credit score.
6 Steps to Establishing a Positive Credit Score
1) Apply for a credit card(s)
But not just any credit card offer you get (believe me, there are lots of bad ones out there!) I recommend comparing credit cards online and looking for ones with zero annual fees and a lower APR (annual percentage rate). Bankrate is a great site for comparing cards. In addition, it may be easiest to obtain a credit card through the bank or credit union that you use for your banking needs. The first line of credit I obtained was through my bank and I was given a reasonably low rate for a first-time credit card user.
Note of caution: It can be very easy to obtain a retailer credit card (TJ Maxx, Victoria Secret, etc.) but they oftentimes have extremely high APRs.
Why is this important? Because although I encourage everyone to pay off their credit cards in full, I know that doesn’t always happen and having a lower APR will help you be able to pay less in interest along the way.
2) Avoid late payments
This is a no-brainer however it can be super easy to miss a payment if you don’t have a system in place to keep track of what is due when. Why is this important? Missing payments not only causes you to have to pay a late fee, it can also increase your APR and trigger an increase in APRs on other cards (even if you’ve never missed a payment!) In addition, even one late fee can significantly decrease your credit score. I strongly encourage you to setup an automatic payment to cover at least the minimum payment in order to prevent this from happening.
3) Increase your credit limit amount
This is the amount of credit that has been extended to you. For example, if you already own a card that has a $1,000 credit limit, give the company a call and see if they will raise your credit limit (and tell them your reasoning is that you’ve faithfully paid off your balance and will be making some larger purchases in the future - even if you don’t plan to!) Why is this important? Because a large part of your credit score is based on the amount of debt you owe vs. the amount that you have left available. The lower your usage rate, the better your credit score will be.
4) Pay off your cards in full
I STRONGLY encourage you to do everything in your power to pay off your cards in full. Yes that may mean you have to limit your expenditures or reign in certain areas of your budget a little more, but it’s a much happier alternative that paying loads of interest on stuff you probably didn’t really need or want to begin with (am I right?)
Why is this important? Not only will you be saving on interest, but credit score companies love seeing responsible behavior and this will increase your score.
If you’re having trouble making payments, give your credit card company a call to see if they will lower your APR (explain that you’re having trouble and are trying to get back on track)
Side note: If you are paying your cards off in full then the APR on your card really doesn’t matter. However, I still encourage you to look for the lowest APR possible to save on interest in the event you do have to keep a balance.
5) Diversify your debt
Up until this point I’ve talked exclusively about credit cards, however it’s important to have other types of debt as well (such as an auto or student loan) Even if you could pay for a car in full, I encourage you to take out a loan. You can pay it down extra-quickly (or even in full!) but the fact that you took it out will still help increase your credit score.
Why is this important? Credit score companies like seeing that you’ve been responsible with more than one type of debt.
6) Keep your cards open and active
This seems counterintuitive but closing credit card accounts can actually hurt your credit score. In addition, if you don’t use your credit card regularly (I encourage clients to use theirs at least every 6 months) the company may close your account. Why is this important? Because as mentioned before, the amount of debt you actually have used versus what the company has extended to you is a major player in your credit score.
Alright, that’s all I’ve got! Any tips to increasing your credit score that I may be missing? If so, drop them in the comments below (or share what you’ve learned about building a credit score too!).
Until next time…
Cheers to increasing your credit!
Katie O.
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