Learning how to build credit is a bigger deal now than it has been in decades. It’s important to not only show that you know how to establish credit, but that you also know how to maintain it and keep it in good standing for an extended period of time.
Checking your credit report and score are always helpful in knowing what’s going on with your credit, but understanding how to build credit is equally as important. The only problem with credit is that it follows a weird system that is often difficult to understand. For this reason, many myths about how to build it and keep it in good standing circulate regularly.
When trying to build your credit you can’t afford to make mistakes because the slightest error could result in an impenetrable record that stays on your report for seven years. So to make sure you’re on the right track, let’s take a look at the myths and tips on building credit.
Myth #1: Putting Bills on Your Credit Card
Because the idea of having a credit history involves using your credit card, some people believe that in order to build credit, they must put everything on their card, including their bills. But the truth is, if you put your bills on your credit card, you’re using your card more than you actually need to and actually paying interest on your bills when you otherwise would not.
Solution: Just pay your bills in cash or check – with your actual in-hand money – rather than building up interest on your monthly obligations.
Myth #2: Charging a Lot of Items
As referenced in myth #1, many think that charging items like crazy will help to build credit. However, this could actually destroy your credit if you fall behind on your payments. Again, the idea is to show that you know how to take on credit then manage it. Not just take it on.
Solution: Instead of charging a lot of items on your card, just purchase one or two items every couple of months to show that you use your card regularly. Then pay them off so that you won’t build a lot of interest on your purchases.
Myth #3: Borrowing Loans
Another myth circulating is that borrowing loans is a good way to build credit. While taking out a loan is a good way to show that you are financially responsible, if done in excess – or in an amount that is difficult for you to pay – you could be setting yourself up for credit disaster.
Solution: If you truly need a personal, auto or mortgage loan then take it out because doing so could contribute to your credit history. However, whatever loan you take out, it’s important that you pay it on time every month or you will be penalized on your credit report, which could significant lower your credit score.
Myth #4: Opening Multiple Credit Accounts at a Time
Some people think that opening multiple credit accounts at one time will help build credit. In theory, adding more credit will build on to your credit report. However, most creditors and lenders view opening multiple accounts in a short period of time as reckless.
Also, because the debt-to-credit ratio (the amount of debt you owe vs. the amount of credit you’ve been extended) is always a factor, you have to manage to somehow maintain about 20 percent debt to the amount of credit available to you – across your entire credit report. Your various accounts will have various limits and will need to be used to avoid closure. And if you miss a payment, all of your work will have been in vain.
Solution: Simply open one card that you think you will use. Don’t run to retailers and banks and open as many cards as you can because you probably won’t really use them – or manage them all properly. Why put yourself through all of the trouble for nothing?
When Should You Start Building Credit?
So now that we’ve explored what will and won’t work when attempting to build and improve credit, let’s look at when you should start building your credit the right way. The answer to when you should start is as soon as possible.
Many people don’t start thinking about credit until they leave home and start getting credit card offers; however, it could start earlier than that. The idea is to get your credit established as soon as possible, because the longer your credit history is, the higher your score will be.
A great way to get started is to open one credit card that you use every month or two and pay off regularly. Also, to help credit a good debt-to-credit ratio, you could take out one loan – maybe on a vehicle that you know you can afford then make your monthly payments on time without exception.
Let’s say you get your first credit card and car note at 18 years old. By the time you’re 30, you will have an auto loan that was in great standing and a credit card that has been will have been in good standing for 12 years.
By this point, you could have also added another one or two new credit cards by the time you turned 22 and, if you haven’t already done so, obtain a mortgage and a new car loan for credit diversity. These additions to your credit report could work wonders for your credit rating.
How to Build Credit for Children
Most people who try to help their kids build credit do so right before or after they graduate from high school. If you’re looking for a way to get started, you could give your child a student credit card, which is typically available to kids in college and offers ways to help build credit history early on.
Also, your child could apply for retail credit, which could be taken advantage of with any retailer that offers a credit card. However, if your child takes out a card on his or her own, it’s important that you teach responsible credit card use so that the credit history won’t be ruined before it’s established. In other words, it’s good to teach, “If you run out of cash, you don’t have any money. Period.”
Building credit is a delicate process that should be handled properly to avoid damage to your report and score. So if you’re just getting started, it’s good to take your time and build it slowly. And if you’ve already made some mistakes, take advantage of credit repair then start again with a clean slate to give yourself all of the opportunities a good credit history offers.