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 (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 every month.
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.
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.
Whatever card you choose, you should never have to pay an annual fee so make sure the card you select has $0 annual fee.
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 of this, the APR % on the credit card doesn’t matter.
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.
Using the rules above, a typical billing cycle will look like this:
- You charge a planned expense, sticking to your budget and not changing your spending habits.
- The bank will sum up all of the activity in 1, and will send you a statement, or a summary of the information it believes to be correct.
- Review your statement for errors, and pay your statement in full by the due date. That way, you pay no interest. Any charges that isn’t listed on the current statement will appear on the next one.
- Go back to 1.
If this seems confusing to you, consider an analogy to your Electric bill. Your institution monitors your charges (pun intended), and sends you your bill. As long as you pay your bill in full, there are no interest or late fees.
Build My Credit Score Step #3: Check Your Credit Report
By law, you get one free credit check per year. Use it. I recommend Credit Karma They’re 100% truly free. 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.
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.