How to Build Good Credit

Use Credit Responsibly

Use Credit Responsibly

Believe it or not, if you bury yourself in bad credit debt, it can not only prevent you from buying a home or car, but hinder you in your next job opportunity.  From the day you get your first credit card, every purchase and every payment matters. Immensely. It’s important to be responsible not only when using your credit card, but also at payment time each month. But what exactly does that mean?

Be Smart

Early on, establish the habit of only charging what you can afford to pay off each month. This shows both future creditors and lenders that you are responsible with your money. Ultimately, this simple habit will make it easier for you to obtain a loan or new credit.  This practice will also help you avoid the pitfall of excessive debt. 

This same discipline applies to obtaining a new loan.  Basically, only borrow what you think you can repay under the terms of the loan, even if the lender is telling you that you qualify for a higher amount.  Before you sign on the dotted line, review your monthly budget and determine what you think you can afford to pay on a monthly basis without it negatively impacting your life and making your budget unmanageable. 

Don’t Overreach

Taking your balance to your credit limit, or even coming close, will be viewed by potential lenders as a red flag.  This is magnified if you don’t pay off the statement balance each month and only pay the “minimum” amount required.  Lenders know that if you are borrowing the maximum amount each month, over time there is a good chance you will not be able to pay off your debt.  Therefore, try to spend less than half of what you are technically allowed to charge each month on your credit card in order to show future lenders that you are responsible.  If you can charge less than 30 percent of your credit limit, even better!

One Credit Card is a Good Start

It is a common to want to obtain multiple credit cards right out of the gates.  Many people end up with a personal collection of credit cards just in the first couple years of their credit life.  A potential huge mistake.  The temptation to use each card in your possession can quickly turn into a negative situation where you cannot keep up with the accumulating balances and required monthly payments.  In addition, each new credit card and credit inquiry actually lowers your overall credit score, adding to the potential of being turned down for a future loan when you may need it.

Pay Your Credit Card Each Month in Full

This topic is closely tied to charging only what you know you can afford. Keeping your purchases within reason, should enable you to pay off your credit balance each month when you receive your card’s statement. Paying your credit balance in full and on time every month, improves your overall credit score and shows future lenders that you are a responsible borrower.

Pay On Time

While not all required payments in your life are accounted for on your credit report, when a past due bill is sent to collections, it becomes another story.  Delinquencies can, and most likely will, end up on your credit report.  Unfortunately letting debt get out of hand and to the point of a collections agency is a hard obstacle to overcome. 

If You Have a Credit Balance, Be Smart About It

Life happens.  If you end up with a credit card balance, it is not the end of the world as long as you are smart about it.  If you find you can’t pay off the balance in full at the end of the month, then you should pay off more than the minimum required in order to pay down the remaining balance as soon as possible.  Do this while avoiding late payments. If you can avoid exceeding 30 percent of your credit card limit each month, then a rolling balance should not hurt your overall credit score. 

Like a Fine Wine, Let Your Credit Accounts Age

As your credit history ages, it actually has a positive impact on your credit score.  If possible, leave your older credit accounts open and active and close more recent accounts instead.  While it won’t have an immediate impact on your credit report, bureaus tend to remove older, closed accounts as time goes by. 

Following these simple rules for managing your credit life, will put you on the road to a lifetime of financial security.