Bad credit can keep you from buying a home, financing your education, and even from getting a job. This is why it's so important to build good credit.
Starting with your first credit card, everything you do that involves credit becomes part of your credit history. To have a good credit history, you have to use credit responsibly. But what counts as using credit responsibly?
1. Only borrow what you can afford
When you get into the habit of charging only what you can afford, it lets future lenders and creditors know that you are a responsible borrower. You'll find it easier to borrow money and get new credit when you show that you know how to only borrow what you can pay back. Not only that, only charging what you can afford helps you avoid excessive debt.
The same thing goes for loans. Only take out as much loan as you can afford to repay, regardless of what the lender says you qualify for. Before you shop for a loan, review your budget to see what monthly payment you can afford. Make sure your loan payment doesn't exceed the amount you've come up with.
2. Use only a small amount of the credit you have available
Maxing out your credit cards – or even coming close – is irresponsible, particularly if you don't plan to pay the whole balance off within the month. Lenders know that borrowers who max out their cards often have difficulty repaying what they've borrowed. Staying below 50% of your credit limit
is wise, below 30% is best to build good credit.
3. Start with only one credit card
Many first-time credit card users accumulate a collection of credit cards within their first few years of using credit. Don't make the mistake of opening up too many credit cards too soon. The more credit you have, the more you'll end up using and the harder it will be to keep up with your balances and payments. In addition, too many inquiries into your credit and too many new credit cards can negatively affect your credit score. Learn how to be responsible with credit
before you apply for additional credit cards.
4. Pay your credit card balance in full
If you're only charging what you can afford to pay, you won't have a problem paying your full balance every month. Paying off your balance each month shows that you're capable of paying bills, something creditors and lenders want to see. Since a large part of your credit score
includes timeliness of your payments, paying your balances on time improves your credit.
5. Make all your payments on timeNot all of your monthly payments are listed on your credit report, so they don't affect your credit as long as you're paying on time. But any bill can potentially wind up on your credit report if you become delinquent and the account is sent to a collection agency. Keep any negative accounts off your credit report to build a good credit score. A serious delinquency like a debt collection can be hard to overcome.
6. If you carry a balance, do it the right way
Having a credit card balance isn't necessarily bad as long as you do it the right way. Pay more than the minimum each month to pay off your balance as quickly as possible. Avoid making late credit card payments
and continue to keep your balance at a reasonable level (below 30% of the credit limit). If you follow these principles, carrying a balance won't hurt your credit.
7. Let your accounts ageThe longer you've had credit, the better it is for your credit score. Leave your oldest accounts open since they help increase your credit age and build good credit. Closing the account won't remove it from your credit report immediately. But, after several years, the credit bureaus will eventually drop old, closed accounts from your credit report.