People with good credit are more likely to be approved for a loan, qualify for lower interest rates and pay less for home and auto insurance than those with fair or poor credit. But establishing a solid credit history doesn’t happen overnight. It requires taking positive action consistently over time. The good news is there are things you can do now to build a strong credit profile and set yourself up for future success.
Learn about credit basics
It’s important to understand what a credit score is and how lenders and other businesses may use it to make decisions about credit applications, determine interest rates and more. Good or bad credit can have implications on your ability to qualify for a loan, get a low interest rate, rent an apartment or pay lower utility deposits in the future.
Habits, such as paying all bills on time, keeping credit utilization low and applying for credit sparingly, can positively affect your credit history. Paying late, accumulating debt and applying for too many accounts in a short amount of time can lower your credit score.
Open a checking account
Most banks and credit unions offer checking accounts for minors or students, but you’ll need a parent to be a joint account holder if you’re under 18. Opening a checking account can help you get used to making deposits and withdrawals and balancing your account.
Practice using a debit card to help prepare for your first credit card; you’ll need to track your spending and account balance to ensure you have enough money to cover a purchase.
Understand the difference between debit and credit
Before you get your first credit card, you’ll need to understand the difference between debit and credit. Because you can typically only spend what you have in your checking account when you use a debit card, debit cards make it difficult to overspend unless you opt into a bank or credit union’s overdraft protection program.
If you have overdraft protection, your financial institution will cover the purchase even if you don’t have enough money in your account to pay for it. However, banks and credit unions charge a fee for this service, and fees can add up quickly if you attempt to make multiple purchases without realizing the account balance is low.
With a credit card, you can make purchases up to the card’s credit limit, no matter how much money you have on hand. Using a credit card is like taking out a high-interest loan, though. If you charge more than you can repay at the end of each credit card cycle, the remaining balance earns interest at high rates – the average interest rate on credit cards that earned interest was 22.75% in November 2023, according to the Federal Reserve. Overspending with a credit card can result in debt that’s difficult to repay.
Monitoring credit history
Everyone needs to monitor their credit history to ensure the information in their file is accurate. Regularly checking your credit reports from the three consumer credit bureaus (Experian, TransUnion and Equifax) can help you quickly identify and resolve errors.
Carefully review your report for inaccuracies, such as payment history mistakes, accounts you don’t recognize, incorrect account opening and closing dates, duplicate accounts and more. If you find an error, you have the right to dispute items on your credit report with the credit bureau and the company that reported it.
Consider a secured credit card
A secured credit card is like an unsecured card with training wheels. When you’re ready to move from debit to credit, it can be a good place to start. It’s easier to qualify for a secured card than an unsecured card, and it allows you to build credit while reducing the risk of overspending and accumulating debt. You must be at least 18 years old to open a credit card, and if you’re under 21, you must show proof of income.
If you’re approved for a secured card, you must provide a deposit to the card issuer before using it. The deposit is often equal to the card’s credit limit and acts as collateral for the card. You can use the card to make purchases just as you would with an unsecured credit card. You’re responsible for paying the bill each month, and if you default and stop paying on the account, the credit card company can use the money in the account to cover what you owe.
Credit card issuers generally report secured card payments to the credit bureaus. A history of on-time payments can help establish a solid credit profile, but late and missed payments will hurt your credit score.
Have more payments reported
If you think lenders are the only companies that can report information to the credit bureaus, think again. Features like Experian Boost® report other types of payments, such as utilities, cellphones, rent and insurance. If you rent an apartment, consider signing up for a rent reporting service to report monthly rental payments to one or more of the credit bureaus. Reporting additional payments may help you build credit faster.
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