Your FICO score is your credit GPA. Combine the amount of credit available to you, how much of it you have used, whether or not your payments are on time and a mish-mash of other factors, and cross your fingers that it looks respectable. Like your grades, there’s no quick fix to reparing poor credit. But over time you can improve your score. Working your way through school is the first step. Even if you’re part-time— it’s not how much you make, it’s how much credit you have earned and how responsibly you pay it back.
Before you enter the credit game, start tracking your spending habits. There is no best age to start establishing credit, explained Beverly Harzog, a consumer credit expert and author of The Debt Escape Plan (February, 2015). “It’s based on maturity, knowledge and self-control.” If you can create a budget—stop your cold-press juice impulse purchases—and stay within your spending limits, you can feel confident about building credit.
Choose your Credit Wisely
Your homework – should you choose to accept it – is to memorize the names of the three top credit reporting bureaus: Experian, TransUnion and Equifax. “Credit gets established when you get credit from lenders or credit card issuers that report to the top credit reporting agencies,” said Gerri Detweiler, Director of Consumer Education for Credit.com. Before signing on the dotted line for a student loan, credit card, or consumer loan, ask if your credit performance will be reported accordingly.
Be an Authorized User
Being added as an authorized user on a parent’s card is a great way to get started, provided they have good credit. Your parents can set controls on the card and limit how much you can charge and keep an eye on transactions to ensure nothing gets out of hand. “It’s very important that the student and the parent talk and decide what may be put on the card. The parent might say, ‘No dorm-wide pizza parties!’ These conversations need to get very, very specific,” said Harzog.
Put Your Federal Student Loan to Work
You may have already established credit and don’t know it. “One of the easiest ways for students to establish credit is to get a federal student loan,” said Detweiler. It may not be enough for someone just starting out since federal students loans are considered installment loans, meaning that you are given a designated amount of money to pay back by a specific time. But it’s a good place to start.
Score a Secured Credit Card
Secured credit cards are great for establishing, re-building, or repairing credit. With a secured credit card you will be required to place a security deposit in a savings account, and your credit limit will be the amount of the deposit. For example, if you receive a $500 secured credit card, you will be able to charge up to $500 and make monthly payments. However, don’t charge the whole $500 available to you – this is explained in detail down below. Harzog put a lot of time into comparing secured credit cards. “A secured card doesn’t say ‘secured’ on the card, the money does not come out of your deposit, so you are actually using credit. I like to think of it as a credit card on training wheels,” said Harzog. Many credit unions offer “credit building loans” that work in a similar way, but without the purchasing of goods or services.
Land a Partially Secured Card
A partially secured card is a great next step. Although a secured card matches your credit limit dollar-to-dollar with your deposit, a partially secured card may require only a $250 deposit for a $500 credit limit, for example, explained Harzog.
Don’t Shop till you Drop with a Retail Card
Shopping can be a good thing. Sometimes. Retail cards—such as Macy’s and Banana Republic— are easy to get but the caveat is that the APR’s are very high. So, although it’s important to pay off your balance in full each month on every credit card, it’s especially important to do this with a retail card. Harzog recommends a retail card only if it’s a store where you shop regularly and can save money on rewards and notification sales. Refer back to the first tip labeled “Practice Self Control.”
Mix and Match
The credit bureaus want to see different types of credit. “Having a student loan, or being an authorized user on someone else’s card can get you started, but it’s probably not going to be enough to build a solid credit rating, certainly in the short term. So, it’s good to have a mix of a few different kinds of accounts,” said Detweiler. She warns that if you don’t need a student loan, don’t get one just for this purpose!
Remember the 10 percent Rule
Here’s the explanation you were promised about why you shouldn’t max out a credit card: A big piece of your credit rating is your available credit/usage ratio. This ratio should be no more than 10 percent for individuals trying to establish or repair credit. This means that if a credit card has a $1,000 limit, you should not charge more than $100. It should be safe to ease it up to 30 percent once you have a strong credit score.
Always Pay on Time!
Always pay on time! That concert ticket you feel you must have but can’t afford isn’t worth the trade-off. “Missing one payment on any loan can drop your score, 40, 50, even 75 points,” said Detweiler. It goes without saying that credit card payments should be made on time too, but did you know that utility and cell phone companies may report late payments to the credit agencies, even though timely payments are not recorded to boost your credit score?