Keepings Things in Line


So if you haven't picked it up yet, credit can be your best friend or worst enemy. It can make your life super easy or incredibly difficult. So we're going to talk about how to jumpstart your way to a good credit score, ways to improve it, and then best practices to keep it good.

Let's say you just got your first job. Congrats! Now you have a regular income, but no credit history. That's okay, because this is the best time to start good habits! There are a few things you can do to get off on the right foot when diving into the credit world.

First, we'll look at secured credit cards. These are special credit cards that you open up with a deposit, say $300. You give the credit card company $300 as a promise that you will pay your credit card bills. They keep the deposit just in case they don't get paid (because they're nervous that you don't have a credit score yet, and they have no proof that you actually will pay them back). Your monthly credit limit will likely be the same amount as your deposit. Then it acts the same as a normal credit card: you charge purchases to it, you get a bill, you pay it off. This type of credit card is meant to ease you into the world of credit and protect the credit card companies. It is SUPER important that you start off with good habits so the companies can see you know how to handle money.

*It is much easier to be strict at the beginning and get a good score off the bat than working to make up for a bad score later*

Make small purchases that you can pay off easily. Make sure your bill is paid off every month. After several months to a year, you will have established some payment history and may have enough credit to apply for a real credit card. Once you close out this secured credit card, you will receive your deposit back. But, make sure to get a secured credit card with little to no fees and that reports to the credit bureaus.

There is also something called a joint credit card. With this type of card, your parents are the primary card holders and you are signed on to be a user. This way, your parents can see everything you're purchasing, you can go over the bill together, and learn from them along the way. Because they have established credit, they are ultimately responsible for making sure it is paid. They got you into the credit club, but once inside, you can work to get your credit score off the ground.

So those are two cheat codes to get into the next level of credit card world. Sometimes you won't need that and you'll be approved to get a credit card right away. (Oh yeah!) Once you have a credit card, we gotta make sure you know the right steps to building great credit.

Start out slow:

Ease into paying bills by starting with only one credit card. Remember how applying for too many credit cards at once makes you seem desperate? Not a great start. Plus, you want to get used to managing your purchases and bills for one card before you get in over your head with too many cards. Run before you can walk.

Pay it all out on time:

If we've said it once, we've said it a million times. Pay your whole bill, on time, every time. 'Nuff said.

Utilization Rates:

Remember this big word we used when we talked about how credit scores are figured out? Well here it is. You want to have a low utilization rate when you use your credit card. No, we did not make that word up, it is totally a real thing. Basically it means that you are only utilizing (aka using) a small part of your credit limit. If you've got a $500 credit limit and use that $500 every single month, people are going to get nervous. Mostly the credit card companies and the credit raters because they know that the more people max out their credit cards, the less likely they are to pay it off. But, if you have a low utilization rate, the powers that be believe that you are going to be able to handle those payments and thus are using your credit card more responsibly than your maxed-out peers.

Ideally, you want use 30% or less of your credit limit. So if you have a $500 limit, you should stay under $150 per month. In cases of emergencies or one-time purchases, it is totally okay to ocassionally go over that limit, but make sure you pay it off on time. If you have a low utilization rate, it helps you to keep an eye on your spending, keeps your bills to a manageable amount, and shows the credit card companies that you won't go crazy at the first sign of some money.

Let it be:

Credit companies like to see that you can manage your money in the long-term. So don't go opening up a credit card for a great promo and then closing it as soon as it is done. Anything that seems flighty or desperate will dock you points. Let your credit cards and other lines of credit age so the bureaus see you can handle your business for a long time.

When you're ready, apply for another card or line of credit (if you need one) after about six months. The pros recommend 2-3 lines of credit open at any time, so that means two credit cards or a credit card and a small loan.

All of these things will help catapult you to a great starting credit score. Following this advice will help to improve your score and keep it from dipping too low! Just know, any hard inquiry into your credit will ding your credit a bit, but it should bounce back (find this info in "What is a Credit Score" lesson).

Once you've had payment history for about six months, you'll probably get your first credit score. Look at you adulting over there, congrats! You can check out your credit score and credit report online. Make sure it is a legit website (we like Credit Karma). Public Service Announcement: Checking your own score won't hurt! Any credit check used to ding you a few points, but then they differentiated between a hard inquiry (can hurt) and a soft inquiry (won't hurt). So if anyone warns against checking your score, tell them that is old news. Check away!

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