Building credit is an important step to creating financial health. Once your credit is established you’ll have more opportunities to qualify for loans, mortgages, and other financial services when you need it. But, it’s important to go about building your credit in the right manner so that you optimize your score to the best of your ability. Here are strategies you need to know to give you ways to build your credit.
1. Start Early
Especially if you are just starting out building your credit, you should start as early as possible. This way you’ll have a long credit history. You probably won’t qualify for the best credit cards without a credit score. So, your best options are to apply for a secured card or a starter card like a student card. Secured cards are backed by a cash deposit. The deposit acts as collateral and typically determines your credit limit. It’s designed for people with no credit history or poor credit to build or rebuild their credit, and they are reported to credit bureaus.
2. Use Your Card Responsibly
Some people who are building their credit make the mistake of looking at credit cards as free money and quickly max out their cards. Remember to use your card responsibly and pay off your cards in full each month to improve your credit score. You may also want to make payments more than once a month so that your purchases don’t accrue interest.
Watch Debt to Income Ratio
Debt-to-income ratio (DTI) is the percentage of your monthly income that goes toward paying debts. It helps lenders assess your ability to manage payments and take on more debt. It’s best to keep this number below 35% for the best credit score which will give you better odds of loan approval and low interest rates.
Don’t Open Too Many Accounts at Once
While opening a credit card is one of the ways to build credit, don’t open too many at one time. Hard inquiries on your credit report will lower your score. Too many inquiries is also a red flag to lenders. Over time you’ll want to diversify your credit types to boost your score such as adding an auto loan or personal loan to show your creditworthiness with different kinds of credit. However, as you first start to build your credit it’s best to start small with one or two accounts to manage.
Check Your Credit Report Often
As you’re building your credit, make sure that you check your credit report often. This way you’ll be able to keep track of your score and ensure its accuracy as you build your credit. You can get a free credit report at sites like Credit Karma or check your score with each credit bureau. If you see any inaccuracies you can always report it or dispute the error. This is important for maintaining your score.
Ways to Responsibly Build Credit
Focus on responsibly managing 1-2 cards, paying bills on time, and keeping balances low to build a strong credit foundation. Over time, all of these ways to build your credit will pay off.
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