If you are buying a house or car anytime in the near future, your odds of getting approved for a loan are much higher if you have an existing credit score.
Some people discount the importance of credit, and because they fear credit card debt, they may avoid a credit card and pay for everything with cash. Although responsible, there are undeniable benefits to building your credit.
Credit refers to how well you repay those who lend you money. If you never take out a loan or apply for a credit card, you probably have no credit history. No credit history can be just as damaging as a bad credit history. But you can easily establish a credit history by applying for your first credit card.
Skip prepaid credit cards.
If you’re thinking about entering the world of credit, don’t even think about a prepaid credit card. These credit cards are unique because you’re only allowed to spend what you loaded onto the card. This is perfect for young adults or people who can’t qualify for credit because you can get a prepaid credit card with no credit history and bad credit. But if you’re looking to build your credit with credit cards, a prepaid credit card will not help you. Prepaid credit cards are essentially debit cards, and this activity is not reported to the credit bureaus.
Go with a secured credit card.
Most people who apply for credit cards don’t want the hassle of paying a security deposit to a credit card company. But if you need to build credit, getting a secured credit card puts you one step closer to A+ credit. These credit cards are typically a top pick among people with no credit history because you can get approved with bad credit or no credit score. Simply complete an application with a local or online bank, submit your security deposit and wait for your credit card to arrive. You get a preset spending limit that’s equivalent to your security deposit.
Pay in full each month.
A large percentage of credit card users cannot pay their balances in full each month, instead, they carry a balance from month to month. It’s okay to carry a balance. Understand, however, those who pay off their balances in full each month typically have a higher credit score. This is because 30% of credit scores are determined by the amount of debt. But even if paying your credit card bill in full each month is a stretch, aim to keep your balance no higher than 30% of your credit limit.
Pay on time each month.
Getting approved for your first credit card is the first step to establishing credit. If you want to achieve the highest score possible, make sure you pay the bill on time each month. Credit card companies report any payment that’s 30 days past due. Each late payment reduces your credit score, and makes it difficult to obtain new lines of credit. To avoid lateness, set up automated payments or pay credit card statements as they arrive.