Seven Ways to Build Good Credit
One of the most exciting parts of growing up is becoming financially independent, but learning how to do it the right way can be challenging. While many young people see credit cards as the gateway to all of the fun things their bank account can’t afford, experts agree that establishing a solid credit rating early is key to building life-long financial stability.
"Get Smart About Credit Day"—observed annually on the third Thursday of October—is a national campaign initiated by the American Bankers Association (ABA) Education Foundation in 2003 to help counsel young people on responsible credit habits. According to the ABA, credit education isn’t just about paying for college, credit cards, and loans. It encompasses budgeting, understanding a credit report, and identity protection. It’s also critical to the post-secondary success of young people, many of whom are starting their adult lives with significant student loan debt.
Young people need to understand how money works and how credit impacts so many aspects of their lives. Learning healthy credit habits early—and how to avoid unhealthy ones—can be one of the most valuable lessons for a young person entering adulthood. Later in life, when they’re shopping for a car or a new home or starting a business, their credit score will be what a lender pays close attention to when reviewing a loan application.
PlainsCapital works with schools and organizations like Junior Achievement and the Texas Council on Economic Education to support personal finance education to help heighten awareness of the impact good and bad credit can have on a person’s finances.
While the key to keeping your credit score high and your credit debt low is understanding the difference between needs and wants, following are seven ways students and young people can effectively build good credit.
- Select the right credit card for you
Not all credit cards are the same. Before applying for a card, do your research. Look for cards with lower interest rates, no annual fees, reasonable credit limits, and clear billing policies. If you think you may carry a balance, go with a no-frills, low interest credit card. A reward-based card touting signup bonuses or easy point-gaining potential may sound cooler, but the higher annual percentage rate (APR) and possible annual fee won’t be worth it.
- Use the card for occasional, small purchases
Getting a credit card means you are starting to build a credit history. But if you really want to start building credit, you have to use the card. One way to do that is by putting small, recurring charges on your card. Think regular expenses like groceries or website subscriptions like Netflix. That way you won’t have trouble repaying your bill at the end of the month. Also, by keeping your debt level low will help ensure that if there is an emergency expense, you’ll still have an available line of credit on your card that you can access. So if your tire blows out, you can purchase a replacement without exceeding your credit limit.
- Pay off your balance each month
When you are building good credit, do your best not to carry a balance on your card. Use the card for purchases you can afford and pay off the balance at the end of each month. Try to keep times when you do carry a balance to a minimum. Carrying a balance means you’ll owe interest fees. Why pay a fee if you don’t have to?
- Pay all of your bills on time
Think only your credit card affects your credit score? Think again. Paying all of your bills—from apartment rent to utilities, library fees and even traffic tickets— consistently and on time is essential.
- Don’t apply for several credit cards at once
Once you have a credit card in your own name, don’t go wild. Applying for too much credit in too short a time period will cause your credit score to fall. Wait until you’ve built up a strong credit core and history before applying for multiple cards. How many cards should you have? To prevent excessive credit card debt, it’s better for most people to have as few credit cards as possible. One credit card is ideal for most college students.
- Use student loans for education expenses only… and pay them back on time
Use your student loan as an opportunity to cultivate important habits that will help you build and maintain good credit. Manage your loans by borrowing only what you need to go to school like tuition and books, not a car. The key to keeping your student loan in good standing is to make at least the minimum payment every month, and do it on time—on or before the due date on the monthly statement. Paying more than the monthly minimum in order to pay off the loan faster is ideal, though not always practical.
- Protect your identity
Checking your credit reports periodically is an important way to guard your identity. The three national credit bureaus—Equifax, Experian, and TransUnion—allow consumers to check their credits reports for free every 12 months. By reviewing the items on your credit reports regularly, you can see if someone has used your identity to open accounts in your name—and take action, if necessary. Setting up automated alerts, activating your card’s ID theft protection service, if offered, and utilizing card control features are added ways of protecting your identity.
Becoming credit wise is similar to gaining any type of wisdom in life—it requires time, education, and being proactive. Following these seven steps will help you improve your credit health and keep your finances in good stead.