Tips if you’re just starting your credit journey

By Erica Gellerman
July 7, 2020

Credit is one of those things you don’t know you need… until you need it. 

You’ll need a good score to get your own credit card, take out an auto loan, get a mortgage to buy a home, and more. 

Unfortunately, we don’t automatically start out with a good credit score, and it isn’t something we can build overnight. That’s why working on it before you need it is a smart way to get ahead!

  1. First, what is a credit score?
  2. How are credit scores calculated?
  3. 5 Tips to Start Your Credit Journey
  4. Building credit takes time

First, what is a credit score?

A credit score is a number that represents your history of borrowing money, including your debt and payment history. Your score is used to help potential lenders determine whether they can trust you to borrow more money.

While the exact calculation of what makes a good credit score isn’t publicly available, FICO, the score most often used by lenders, has openly shared what’s important in calculating your FICO credit score

Did you know Chime's new Credit Builder has no fees, 0% APR and helps you build your credit? Join our waitlist today!

How are credit scores calculated?

While the exact calculation of what makes a good credit score isn’t publicly available, FICO, the score most often used by lenders, has openly shared what’s important in calculating your FICO credit score. This includes:

  1. Payment history: A long history of on-time loan and credit card payments will help you get a better score. If you miss a payment, you can expect your score to take a hit.
  2. Credit utilization: This is how much of your available credit is being used. For example, if you have a $1,000 credit limit and you have a $500 credit card balance, your credit utilization is 50%. A high utilization can signal to borrowers that you might be overstretched and unable to repay what you’ve currently borrowed. Experts recommend keeping your credit utilization below 30%.
  3. Length of credit history: When you’re just starting your credit journey, you won’t have a long credit history. But it’s important to start building this up nowbecause future lenders like to see that you’ve had a history of making on-time payments. The longer your history, the better. That means once you’ve had a credit card for a while, you’ll probably want to keep it open so it can continue to show up in your credit history. 
  4. Inquiry: Each time a potential creditor checks your credit history (a “hard” inquiry), your score will drop a few points. Don’t worry, it will recover. But you’ll want to avoid applying for too many things at once and having too many hard inquiries on your account. If you’re not sure if applying for something will affect your credit score, check to see if the creditor is going to do a hard or a soft inquiry. 
  5. Types of credit: Having more than one type of credit can help to boost your score over the long-term. For example, a credit card and student loan that you pay on-time can help. When you’re just getting started with building your credit history, you may just have one type of credit, but eventually, that will likely grow.

5 Tips to Start Your Credit Journey

Now that you know what’s important for a good credit score, it’s time to start building it! Here are 5 tips you can work into the beginning of your credit journey. 

1. Become an authorized user

An easy way to start building your credit is to become an authorized user on someone else’s credit card. If you have a family member or partner who is willing to add you to their card as an authorized user, you’ll get their credit history added to yours. So find someone with a long history of on-time payments and you could get an instant boost to your own credit history, just from becoming their authorized user. 

There’s a lot of trust required in this arrangement because, if you run up a bill and don’t pay it, they’ll be on the hook to either make the payment or risk hurting their credit score. 

When you get added as an authorized user, you’ll have a credit card and the ability to make charges. But, before you do, make sure you come to an agreement with the cardholderlike how comfortable they feel with you using the card, and when they’ll need you to make payments. 

2. Get a credit card

Without a credit history, it might be difficult for you to qualify for a credit card. But there are options that can make it easier. 

  • Secured card: Another option for getting a credit card without a credit history is to get a secured credit card. With a secured credit card, you’re required to make a deposit that is held as collateral. That means you will need to save money before you’re able to apply for a secured card. For example, for a secured credit card with a $500 limit, you’d need to make a $500 deposit before using the secured card. That way, if you’re unable to pay your outstanding balance, the credit card company can keep that deposit.
  • Chime Credit Builder: Chime’s new Credit Builder card is a no fee, 0% APR secured credit card that helps you build your credit. Each month, Chime reports payments to the major credit bureaus so everyday purchases like gas, groceries, bills, and subscriptions can all count towards your credit score. You can join Chime’s Credit Builder waitlist here. Unlike traditional secured credit cards, Credit Builder does not check your credit at application and has no minimum security deposit.
  • Co-sign: If you have someone who is willing to co-sign on a credit card with you, that can help you get approved without having credit yourself. When someone co-signs a credit card with you, you are the primary cardholder and can use the card to make purchases and are required to make payments when they’re due.  However, it’s important that you both know the responsibilities that come with being a co-signer. If you aren’t able to make a payment, your co-signer is responsible for the unpaid balance. If the credit card doesn’t get paid, you could both see your credit scores drop. 

3. Make on-time payments

As you now know, your payment history plays a big role in your credit score. That’s why it’s important to get in the habit of making on-time payments, and aim to pay your balance off in full each month. 

Note: Interest charges and fees on a credit card can add up quickly so if you miss payments you might not only hurt your credit score, you could also find yourself paying a lot in fees.

4. Get credit for more

You probably already pay billslike for your phone, or various utilities. Unfortunately, you’re probably not getting credit for making those payments on your credit report. 

With Experian Boost, you can get credit on your credit report for paying these bills. That means you can help build your credit history just by doing what you normally do. Not all lenders will use credit score information that includes data from Experian Boost, though, so you’ll want to make sure you take the other steps included in this article, too.

5. Check your credit report

Because your credit report is so important to your financial health, you’ll want to make sure that it only includes accurate information. That’s why it’s important to regularly check the details listed in your credit history and make sure there are no errors. If there are errors, you’ll need to dispute them so they don’t affect your credit score. 

It’s also motivating to check your credit score and watch all your hard work pay off! You can check your credit report for free once each year using AnnualCreditReport.com. And to check your credit score, you can use a free service like Experian Boost

Building credit takes time

When you’re first starting on your credit journey, it can feel like you have a long way to go. You’re not going to build good credit overnight. But by putting in time to practice these tips and building solid financial habits, you’ll be able to build the credit history you need over time! 

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Erica Gellerman is a CPA, MBA, personal finance writer, and creator of TheWorthProject.co. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom, and Lifehacker.

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