To preface, I am not a financial consultant, CPA, etc. etc.
I have however built a respectable credit score in my short credit history and I can share a few tips to get you there as well.
First, let’s start off with the basics. You need a credit card. To build credit you first must establish credit. This should be relatively easy to do after all credit card companies are handing the things out like candy, but you want to choose the right one. One of the cards I have is a Discover It student card. This card earns 1% cash back on all purchases, 5% cashback on certain rotating categories every quarter, 1-year cash back match (just received mine ~$75), and $20 a year for good grades, reports credit score from Transunion.
Solid card, with no annual fee, plenty of perks, and 15-24% APR. For more information check out this blog post here
Step 1. Get a card
It doesn’t have to be that card, I also have a Visa Signature Card and I think that’s also an incredible card. Overall, I would look for a card that gives you feedback on your credit score, no annual fees, decent cashback opportunities etc.
Step 2. Use the card responsibly
You have a card now you need to use it responsibly and there’s several factors into this. Part of your credit score (30%) is based on your revolving credit utilization. That means they look at how much credit you have across all your lines and how much your balance is and convert it into a percent. Total balance/ total credit line = % Utilization.
As of this moment my total balance owed is $201 and my utilization is 2% which puts me in the very good category. If you carry a high utilization, then your credit score will be negatively affected. I would also suggest using your credit card responsibly to ensure you can pay the full balance off every month. It doesn’t make any sense paying extremely high interest rates on credit cards that’s just extra money out of your pocket.
Another portion of using your card responsibly is for the cashback rewards, now obviously do not violate the two rules above for the sake of cash back rewards but when you can get a nice little 5% at amazon or your grocery store you may want to opt in to use your card at these places and use cash or debit at others.
- Hold onto that credit card
Another aspect of your credit score is your total accounts and length of credit. (10% and 15% respectively) For total accounts I have three credit cards and zero installment loans. I’ve never cancelled a credit card even though my first card hasn’t been used in years (a beginner Visa card with a down payment required). Length of credit also factors into your score, the longer your accounts are open, generally the better. FICO credit scores also consider the newest account, oldest account, and average age of accounts. Essentially even if you don’t use a card anymore and assuming it doesn’t have an annual fee just hang onto it. You don’t have to use it for the account to remain active.
- Make the payments
Its obvious but I will reiterate. About 35% of your credit score is based on your payment history. One missed payment will affect your score. They keep track of the last 7 years of payments, so I mistake now will still cost you 7 years down the line. Make your payments every month (when I get paid biweekly I pay off my credit card every 2 weeks), don’t miss a payment and keep a great credit score.
The last portion that comprises your score is credit seeking inquiries which comes out to 10% of your score. This happens when lenders do a hard inquiry of your credit and it is tracked over the past 12 months. Obviously, some of this stuff is unavoidable (buying a new car etc.). Fortunately, the Discover It card isn’t a hard inquiry, so it does not affect your credit score, or I would probably lose every bit of that 10% of my score.
That summarizes how your credit score is comprised and what you can do to improve your score. Another way to increase your score is after having good credit with existing accounts for some time you may be offered a larger credit line. For example, my first credit card account had a tiny credit limit of $800. After 2 years of so I received a credit line extension of $3500 = a credit line of $4300 total. If you remember the line utilization problem of total balance/ total credit line = utilization %, when you extend your credit line and keep spending habits the same your utilization will lower and therefore increase your credit score. When those opportunities arise take them and don’t go crazy with the larger credit line.
Those are the tips and tricks to building a great credit score! As I am writing this I currently have a credit score of 788 and my earliest line of credit was April of 2014. I’m pushing to break past the 800 mark and the only portion holding me back is the length of credit and father time is responsible for that.
As always if you have any questions feel free to leave a comment or hit me up on Instagram @bsquared.website