Q: How do I begin to build credit?
A. Dear Reader,
Building your credit, whether you are starting from scratch or recovering from past financial mistakes, requires time, dedication, and a strategy. Since you have already taken the first step by asking yourself this question, we will look at some of the next steps you can consider.
One credit building option to consider is a secured credit card. Secured credit cards are widely available through most major banks and they typically work like any other card with only one difference: they require you to make a cash deposit in the same amount of your credit limit. As you know, lenders use your credit report and credit score to measure your creditworthiness, in other words, to determine how much of a risk they are taking by offering you a line of credit. Since you don’t have a credit history yet, they consider you as a high-risk consumer and require you to make the deposit as insurance, in case you default in any of your payments. Your deposit is returned to you if you close the account in good standing or if your secured card is converted into an unsecured card. Like with any financial product, you should shop around and compare offers, since these cards usually carry an annual fee and offer different terms.
Once you have your card, you need to use it strategically. Your credit score takes into consideration several factors. According to both FICO and VantageScore, two of the leading credit scoring models in the nation, the factor that influences your score the most is whether you pay your bill on time. Late payments or missed payments are very detrimental to your credit history, so make sure you always pay on time and if possible, pay in full. Almost as important, is your utilization ratio, which is how much you owe compared to your available credit. It is recommended to use about 30% of your available credit to maintain a healthy balance. This means that if your secured card has a credit limit of $300, you should be using about $90 per billing cycle. Paying on time and keeping a low utilization ratio will help you establish a positive credit history and build your credit. The older your credit history is, the higher your score will be.
After you have had your secured card for about a year, if it’s not converted to a regular card by your creditor, you should consider looking for a new unsecured credit card. Shop around for offers. For instance, gas cards and retail stores typically offer credit cards with few restrictions, but usually charge their costumers high interest rates if they don’t pay the full balances every billing cycle. Considering your choices, you must be selective and strategic when you ask for new credit. Too many inquiries in a short time will have a negative impact on your score as it could be a seen as a sign that you are overextending yourself. When you get your first credit card, you should keep using the same strategy: paying on time and–if possible–in full, and keeping your utilization ratio low.
If you feel you need a more personalized strategy to match your unique needs, you have additional resources at your disposal. You can talk to a certified counselor from an NFCC member agency and you’ll be able to learn more about the five factors that influence your score, how credit works and how to use it strategically to make the most of your finances.
Barry Coleman, Vice President of Counseling & Education Programs
Barry Coleman has over 16 years’ experience in the credit counseling industry previously holding several management positions in training, regulatory compliance, and financial counseling. Barry holds a Bachelor of Arts Degree in Organizational Management from Ashford University and a Master’s of Business Administration Degree from Ohio University. In addition, Barry served over 32 years in the United States Air Force and the Air National Guard, retiring in 2010 as the State Command Chief Master Sergeant of the Virginia Air National Guard.