If you’re a recent college grad, chances are you have very little credit — or none whatsoever. As you venture out on your own and life starts getting real, having a sterling credit history and score will boost your chances of getting approved for that car loan or mortgage.
“The best time to start is when you’re on a limited budget,” says credit expert Kimberly Rotter, “because you may be less likely to let your balance get away from you.” Since there’s no better time than now, here are seven tips to get a jump on building your credit:
1. Order a free credit report
First things first: Get a credit report and check for errors. You can order one per year from each of the three major credit bureaus. Stuff happens, so carefully comb through for anything that’s incorrect or looks fishy.
Even if you have a thin profile, inaccurate info such as bills reported unpaid — or equipment unreturned from your cable provider — could ding your credit. While other kinds of mistakes, such as typos in your personal information, won’t affect your score, make sure your credit report is accurate to avoid future problems.
2. Consider applying for a retail credit card
If you’re a newbie credit-card holder, retail and gas credit cards are generally easier to get approved for. However, carefully review the annual interest rate (APR), and check for fees and terms.
3. Be added as an authorized user
Being added as an authorized user is a credit-boosting strategy typically used for those who have poor or little credit. When you’re added as an authorized user to say, your parents’ credit card, it could help build your credit.
But, proceed with caution. When you’re added to someone else’s account, their credit habits can affect you as well. So, if they’re late on their payments, which hurts their credit, your credit score could be negatively impacted.
4. Get a secured card or credit-builder loan
With either option, you’ll have to pony up a refundable security deposit that’s equal to your credit limit, explains Louis DeNicola, a freelance personal finance writer. For instance, if you’re signing up for a secured card and deposit $500, your max limit on the card will also be $500.
Your monthly credit card or loan payments are reported to the credit bureaus, which in turn help you boost your credit. “A credit-builder loan, generally available from credit unions, may be the safer option since you can’t overspend and wind up with credit-card debt,” says DeNicola.
5. Make early and multiple payments
To perfect the art of keeping debt low, review and pay off your charges every week or twice a month, explains Rotter. “That’ll help you keep a lid on spending and avoid the bill-shock that can accompany a whole month of carefree card use,” says Rotter.
Because your debt utilization or credit utilization ratio makes up a sizable chunk of your credit score — 30 percent, to be exact — making early payments will help boost your score.
For instance, if you have a $250 balance on a $300 credit limit, explains Rotter, your utilization is a whopping 83 percent. While the recommended ratio is no higher than 30 percent, the lower, the better.
The kicker? If the balance is reported before your payment due date, your utilization can look high, even if you pay off your bill in full by the due date, explains Rotter. “Pay it early, though, and the credit bureaus will see little or no debt, and that’s great for building credit,” says Rotter.
6. Monitor your credit
You’ll want to keep regular watch on your credit. This will help you gauge the progress of your credit-building efforts, plus raise flags for fraudulent transactions. Make the most of free tools and resources. Many credit card companies offer free credit scores. Note that the credit scores provided may be based on a scoring scale other than FICO®, which is the more common credit score for consumers.
7. Pay your bills on time
Paying your bills on time is the most fundamental way to establish and preserving your credit. No exceptions. As your payment history makes up 35 percent of your credit score, this is the foundation for great credit, explains Beverly Harzog, credit card expert and author of the Debt Escape Plan. To help you make on-time payments, set up a budget, track your spending, and set up auto pay. That way you won’t miss a beat.
While you should pay all your bills on time regardless, note that while your student-loan payments and credit-card payments do get reported to the credit bureaus, other bills such as your rent and phone bill don’t, explains DeNicola.