One of the most important things that schools don’t teach us in preparation for the real world is how to build my credit score quickly. This is something that most of my friends did not have in college since most paid their expenses off straight cash (not a bad thing but doesn’t build credit) given to them from parents or by taking out part of their school loans. Over the years, I’ve learned that to build my credit score, it takes time and it’s best to get started early, while in college or even as early as high school.
First, the easiest thing to do to get started is to apply for a credit card and pay off your bills every month on time.
There are many companies that offer low limit credit cards for college students to help get them started.
Below, I’d like to go over some steps to start building your credit.
Build My Credit Score: The Health Check
How is your current financial health? What are your spending habits? Do you have a shopping problem? Do you have a savings account?
Having a credit card can be a double-edged sword.
The first thing to do is to prepare yourself mentally and be disciplined about your spending. The average household in America has about $15,000 in credit card debt (source: http://www.debt.org/faqs/americans-in-debt/).
In the past I have also seen myself saying “Oh hey, I can just charge this now and pay it off later”. This style of finance will always keep you below sea level as you constantly strive to pay back debts each and every month until you repeat the cycle again with your next big purchases.
What I would recommend is to budget out your available spending for that month and spend no more than that on your credit card if you have to.
Treat your credit card like a debit card. Don’t make purchases that you do not have the cash to back.
There’s absolutely no reason to have to maintain a credit card balance and give away free money to the credit card companies.
Here’s a checklist of things to consider before opening up a credit card:
- Have some money in your savings account.
- Go over your spending habits.
- Maintain a consistent source of income.
- Determine your expenses.
Build My Credit Score #1: Apply for a Credit Card.
First thing is to actually apply for a credit card. But which ones? There are so many out there with so many different perks and bonuses.
One of the best sites I’ve seen out there for finding a credit card is NerdWallet. They have a great filter and selection engine that lets you set the criteria you want for a credit card. Feel free to pick any of the rewards criteria but for this scenario, I would go with the “Cash Back” option. (Disclaimer: I have no affiliation with NerdWallet. In fact, I interviewed for them once and they rejected me.)
Whatever card you choose, you should never have to pay an annual fee so make sure the card you select has $0 annual fee.
If you do have to pay an annual fee, at least make it so that the annual fee is worth the benefits in some other areas. Maybe free car rental insurance or access to sky lounges.
Now, with this new credit card, you will be paying off the statement balance in full every month (yes you will do this, or else).
Because you’re paying off your balance every month, the APR % on the credit card won’t matter. Because you won’t be charged interest if you have no balance.
If you are a student who cannot get approved for a “starter card”, there are still plenty of student cards that are available for your situation.
Build My Credit Score Step #2: Understand The Rules for Using your Card:
- Use your card only for planned expenses.
- Do not change your spending habits simply because you are using credit instead of cash. Rewards are nice, but spending a dollar to earn a penny is foolish.
- Always pay your statement balance in full by the due date. No exceptions. Remember: there’s a special technique to paying off your credit card that I write about here.
I’ve seen a lot of people (like my idiot cousin) who will rack up so much credit card debt because “it’s free money!”.
No it’s not free money you moron, you have to pay it back or collections will come after you.
Using the rules above, your typical monthly billing cycle will look like this:
- You charge your credit card for something or somethings.
- The bank will sum up all of the activity in 1, and will send you your monthly statement on what you owe.
- Review your statement and pay your statement in full by the due date. That way, you pay no interest.
- Go back to 1.
Be sure to check your statement for any errors. Make sure people haven’t stolen your credit card information and bought stuff.
Build My Credit Score Step #3: Check Your Credit Report
By law, you get one free credit check per year. Use it.
However, I currently use Credit Karma. They’re 100% free and you can check your credit as much as you want.
They make money through advertisements so as long as ads don’t affect you, it’s fine.
There’s no trial period, no secret monthly payments, and no credit card information required.
Use this site to check your score every few months. You want to see how your credit is building and to make sure there aren’t any anomalies.
Build My Credit Score: What’s a Good Score?
Experian has a nice graph that shows you the different tiers of credit scores available.
Ideally, your goal will be to get above 800. This is pretty hard to do and will take a long time. The higher your score, the better your rates and deals when you take out loans for your future purchases.
It will be a long process and it will take discipline but once this becomes a habit, you’ll be on your way to raising your score in no time. If you’re starting off from scratch, it may take a few months to years before you get a desirable credit score. This is because one of the biggest factor in determining your credit score is the length of your credit history.
Starting a credit file in college is the best time to begin building credit. Afterwards, once you graduate, carry your card into your professional world. This is when you’ll have a stronger income source. Then, within a few years, you’ll have a high enough credit score for great rates on loans and mortgages.