How Credit Works: Tips for Building Credit

If you plan to make any major purchases in your life — say, a college education, a car or a house — you’ll either need a giant pile of cash on hand or access to credit. For most of us, credit is a necessity in life. That means you’ll need to know how it works and how to use it responsibly. It’s also useful when seeking employment as more and more employers are using it to check if an applicant (future employee) is responsible with their finances.

If you missed our first post in this series about credit, you can click here to catch up.  Once you understand what your FICO score is and it is calculated, you’re ready to take action to boost your score and build your credit so you can get the things you need.

Try these tips to build a solid credit record today:

  1. Pay Down Your Debt

First things first: If you’re carrying a lot of debt, you need to pay it down. This is the number one thing you can do to get yourself on solid financial footing, and it also helps improve your credit score. This is because credit utilization makes up about 30% of your FICO score.

Credit utilization is about how much credit you have vs. how much you’re using. If you’ve maxed out your credit cards, your credit utilization is sky-high, and this hurts your credit rating. Paying down your debts improves your credit utilization, and therefore boosts your credit score.

The upshot here? Starting today, you should commit to paying off all debt except your mortgage, whether than means car loans, credit card balances, student loans or anything else.

I don’t ever surpass 1% of my credit utilization and my credit score is 836. Don’t believe the myth that you

  1. Apply for a No-Fee Credit Card

If you don’t already have a credit card or a loan, you don’t need to improve your credit score — you need to get one. One of the more ironic things about the financial world is that it takes credit to get credit, and you have to start somewhere.

The easiest way to build credit is with a credit card that you use very carefully. To keep costs down, make sure that you choose a card with no annual fee so that you don’t have to pay for the privilege of having some plastic.

If you’re a student, look for a no-fee credit card aimed at college students. If you’re out in the work force, try a no-fee credit card aimed at people with “fair credit” to improve your odds of a successful application. Search NerdWallet’s website for the best credit cards for your situation to get started. If you can’t get approved, a secured credit card is the best way to go. Remember my most important tip which is to pay off your credit card in full every week (use it like a debit card).

  1. Use Your Credit Card for Necessities Only

Now that you have a credit card, it’s time to use it! The best way to build credit is to use your card for things that you need and that you’re sure you can pay for. Good candidates for credit card charges are:

  • Groceries
  • Gas
  • Rent
  • Work expenses
  • Typical household expenses

The idea here is that you only buy things you have budgeted for. (Take our Budgeting 101 Class if you don’t have a budget yet, it’s only 20 minutes). Your card is not to be used for “wants” that could push you over your budget limits, because you want to be able to…

  1. Pay Your Credit Card in Full Every Week

Your credit card gives you the ability to carry debt, but that doesn’t mean you should use it! Carrying a balance means that you’ll pay interest on your purchases, and this is the last thing you want. I’ve never paid $1 of interest and have a credit score of 836.

As mentioned earlier, the other reason to make sure your credit card is fully paid each week is to keep your credit utilization low. If you don’t have a balance, you have a nearly 0% credit utilization, which is excellent for your overall credit score. If you don’t want to pay it off each week, pay it off each month. Never carry a balance!

  1. Pay Your Credit Card Bill on Time

When it comes to building credit, making payments on time is the number one thing that affects your FICO score. It cannot be stressed enough: Pay your bill on time, every time (or early)! This is the most important way to build your credit and show yourself to be a responsible person with your finances.

It takes time to build your credit, but it’s well worth the effort. The sooner you start, the sooner you’ll be on the road to solid financial health.

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