If you don’t have any credit history, you probably know you need to have some. You may have made attempts to build your credit by applying for credit cards or loans, and were denied. Frustrating!
Building healthy credit doesn’t have to be complicated or put you into debt. It’s very wise to start building your credit well before you need to use it, because good credit takes time.
Why you need to build a good credit score
Having no credit can be incredibly expensive: If lenders don’t know whether you pay your bills on time, they view you as a higher credit risk. This means when you go to finance a car or home, you’re going to pay thousands more in interest than someone with a healthy credit history and credit score. Not only will you get better interest rates with a positive credit history, but with a good credit score also comes credit cards that reward you with free travel.
I built my own credit from scratch after having filed bankruptcy. It takes time, patience, and discipline, but I now have a score near 800! If I can do it, anybody can…if you know what to do!
A friend inspired this post when she asked me how to start building her credit. She got a secured card with a $200 limit, but wasn’t sure how to use it so it would help her and not hurt her, because she wants to buy a house in a year or two. I applauded her for wanting to know how to do it right, and a secured credit card is a great place to start!
Read on for the 6 steps I gave my friend to start building a great credit score!
#1 Take note of 2 important credit card dates.
Two dates are important when working to raise your credit score: your statement date, and your due date. Both can be found on your monthly statement. Mark your calendar or set an alarm on your phone for a day or two before each of these dates every month.
#2 Use your credit card.
You can’t build a positive credit history by not using credit. What will build your credit is showing the bureaus that you’re only using a fraction of your credit limit.
Never use your credit card for things you cannot afford.
The key to using credit cards without racking up debt is to only use your cards to buy things that you’d buy in cash anyway. You’re just passing these purchases through your credit card first, before actually paying for them, to build a credit history. People go into debt when they treat their credit cards like extra money.
The best way to build credit with credit cards, in my opinion, is to automate your credit card spending with a small monthly bill. Read more in Raise Your Credit Score Automatically.
#3 Pay your credit card balance down before the statement date…
…but don’t pay your credit card balance in full!
Your statement balance is the information that is sent from the credit card company to the credit bureaus that is used to calculate your credit utilization. If you pay your credit card balance in full before the statement date (not to be confused with the due date!) the credit bureaus don’t know whether you’re using credit responsibly or not using your credit card at all.
Leaving a small balance on your credit card to be reflected on your statement shows the bureaus that you’re using credit responsibly. This is called credit utilization and it accounts for nearly ⅓ of your credit score!
Your credit utilization is the percentage of your available credit limit that you’re using. If your credit limit is $200 and you’ve charged $20, your credit utilization is 10%.
You may have heard that 30% is the magic number for credit utilization, but that’s not exactly the case. Leaving above 30% of your credit limit as a balance on your statement can be harmful to your score, definitely. To get the maximum boost to your score, however, you don’t want to have anywhere near 30% utilization. Under 10% is going to give the best results. I like to do 5%, personally.
Be sure to pay the credit card down to LESS THAN 10% of your credit limit before the statement date. In my friend’s case, with a $200 limit, she wants her statement balance to be less than $20.
#4 Pay your credit card balance off in full before the due date.
You DO NOT need to carry a balance past the DUE date! You boost your score by having a balance of 10% or less on the STATEMENT date. Carrying a balance past the due date is what creates interest charges and leads to credit card debt. Pay your credit card off in full before it is due to show an on-time payment history and avoid interest charges.
Here’s an example of what this might look like for my friend, whose credit limit is $200:
But wait! There’s more to building credit than just credit cards!
Showing a balance of under 10% to bureaus and paying it on time before the due date can raise your credit score significantly, especially if you have no credit history. But I gave my friend another suggestion that can boost her credit score further!
The credit bureaus also look at your credit mix, and they like if you have different TYPES of credit. Credit cards are what are classified as revolving credit, which means you pay the balance and are loaned the money again the following month. Installment loans are a different type of credit. Installment loans, for example car loans or personal loans, are when you’re loaned a lump sum of money, and you pay the balance down over time until the loan is paid off. Having an installment loan in addition to the secured card is great for your score because it shows you can responsibly handle different types of credit.
How do you add an installment loan to your credit history without debt, you ask? That brings us to the 5th step I gave my friend:
#5 Open a Self Lender account.
Self Lender helps you build your credit by issuing a small loan and putting the money into a CD for you. This type of loan is called a secured loan. When you’ve completed your payments on the loan, the money in the CD is returned to you.
Bonus: applying for their credit builder account will not even cost you a credit inquiry!
Self Lender offers a few options for their credit builder loans, but if you’re taking the loan to build your credit, you only need to do the minimum loan of $550. Doing the larger loans will not build your credit any faster, and this keeps your monthly payment down.
#6 Pay your Self Lender Credit Builder loan on time.
Make on-time payments towards your loan monthly. If a $50 a month payment is going to stretch your budget too far, I don’t recommend getting a Self Lender account, because late or missed payments will only leave your credit worse than when you started!
I have a Self Lender account myself, and my payment is $48.50 a month. I have automatic payments for the loan set up so I don’t even have to think about this account while it builds my credit!
When you’re done paying your credit builder loan, not only do you have positive payment history for an installment loan that will show you paid what you borrowed on time and paid in full (which can hang around on your credit report for up to 10 years, showing lenders how responsible you are), but the payments you made (less some small fees) are returned to you, because the original loan amount was kept in a CD. No debt, and you’ve even got a little savings!
You get back a little less than you paid in, but it’s a small price to pay, since having good credit can save you thousands in interest payments and qualify you for the best rewards cards!
Follow these 6 steps for just 1 year, and you’ll have a beautiful year of credit history and likely a sizeable jump in your credit score.
When you apply for a mortgage, or a travel rewards credit card, the lender will not only see that you paid on time, but also that you didn’t use your credit to finance things you couldn’t afford, that you didn’t max out your cards just because you had them, that you were loaned money and paid on time and in full to your Self Lender account, and that you can handle several types of credit with more than one monthly payment.
Best of all? This two-punch method of building healthy credit creates ZERO debt!
Using these 6 steps will have cost you about $43 in fees from Self Lender, plus most likely an annual fee from your secured card. I hate fees, but these fees are a small price to pay to be able to qualify for a mortgage, potentially save thousands in interest charges, and rack up those travel rewards!