How to Build Good Credit

Reviewed: February 22, 2014
By FinanceWeb

Good credit is essential for many of the major milestones in life. For instance, a relatively high credit rating is essential when you decide to buy your own home. Now, it’s quite common for potential employers to check your credit before offering you a position. While it is evident that building and maintaining a good credit rating is important, you must first know how to address credit concerns.

Earning good credit, first of all, takes time. When you’re just starting out, it will take a little while to really begin to get credit building opportunities. However, it’s never too early to learn how to handle your financial responsibilities so that when you do have those opportunities, they don’t become burdens instead.

Live Within Your Means

Once you begin to take on credit card accounts, it can be very tempting to keep using them until there is no limit left. However, this is not living within your means. When you use a credit card, you should be able to pay off that balance quickly. Paying only minimum payments for an extended amount of time is a sure sign of trouble to come, although as long as you maintain those minimums your credit score shouldn’t suffer too much. By paying off your balance quickly, however, you let other lenders know that you are committed to only buying what you can afford.

Not only does this concept apply with credit cards, but also with loans. It isn’t unusual to be able to qualify for a larger loan than you can comfortably afford to repay. Before you ever go to apply for a loan, sit down and take a serious look at your budget. What can you truly afford to pay each month toward a loan without being overextended? Do not under any circumstances accept a loan that requires a larger monthly payment than what you’ve budgeted.

Start Small

If you’re just starting out, it may be difficult to turn down all of those lovely pre-screened offers that make it into your mailbox. However, it really is best to begin with one credit card and stick with that one for a while. If you open several credit card accounts at once, you are in danger of borrowing too much too quickly and being saddled with debt before you truly have a handle on what it is. Also, each time an inquiry is made into your credit, there is a small plummet in your rating.

Keep Your Debt Down

Rather than getting carried away with that all that you can purchase with your new card, learn to keep your balance down to a minimum. Just because you have a $1000 limit doesn’t mean that you have to use it. Ideally, you would spend no more than 30% of your available credit. If that isn’t possible, shoot for the 50% mark.

Make Payments to Your Advantage

The ideal credit card situation is that you will only charge what you can afford to pay in full that particular billing cycle. Doing this raises your credit score tremendously. Also, making certain to pay your bill on time each month is crucial to building good credit. Once a debt has been sent to collections, it can be quite the ordeal to bring your credit score back to an optimal level.

Also, while it is the best situation that you pay off your full balance monthly, sometimes this just isn’t possible. When this happens, try to make a payment substantially higher than the minimum. Having a balance won’t necessarily harm your credit score as long as you stay well below your credit limit and make timely payments.

Building your credit is important to your financial future. Following the above tips will help you to do just that. Learn to handle credit opportunities well, and you’ll have great credit sooner than you think.