What you Need to Know About Building Credit

If you have recently graduated from college, establishing good credit might seem like a catch-22. You need a responsible credit history to get approved for credit, but until you’re approved for credit you have no credit history.

Fortunately, there are ways to start building your financial reputation from the ground up. Here are three steps you can take to start building credit and your creditworthiness.

1. Building Your Credit

Make credit card purchases that you can afford to repay in full each month so that you are not charged interest while building a good payment history.  Your credit history accounts for 15 percent of your credit score, so it’s important to start building credit as early as possible. So when you’re starting your career, look for cards marketed toward individuals with little credit history or low-limit department store credit cards. Looking for a card with no or a low annual fee is also a good idea. You may ask a family member to co-sign on a credit card in your name in order to help establish credit.

Credit service companies rate individuals higher if they have three open and active lines of credit. But as you obtain additional credit, be careful to pay off each balance on time every month.

2. Get Different Types of Credit

Your credit score improves when you can demonstrate your ability to handle different types of loans. Some types of loans include the following:

  • Credit cards are considered revolving credit. This type of credit demonstrates how well you manage charges and payments on a credit line each month.
  • Car loans and mortgages are types of fixed-installment credit. This shows how reliably you make monthly payments against a major purchase.
  • Bank installment loans can be secured by collateral and allow you to prove your creditworthiness by paying them off over time. Cash secured loans can be particularly helpful if you are unable to obtain one of the other types of credit.

3. Pay Your Bills on Time

Once you’ve acquired a credit account or two, it’s time to get to work. That means paying your bills on time and keeping your balances low. On-time payment accounts for 35 percent of your credit score, while the balances of your credit accounts make up another 30 percent.

To make sure your payments are never late, consider setting up automatic payments from your checking account. And when it comes to carrying a balance, the National Foundation for Credit Counseling recommends that you keep the total amount you owe lower than 30 percent of your total available credit. You can avoid paying interest if you pay your balance in full every month.

Making financially responsible choices isn’t always easy, but knowing how to build good credit from the start will put you on the path toward long-term financial success.

Start off on the right path to improving your credit score with our Building Credit Checklist.