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Planning your financial future

How to build credit and improve your credit score

Building a credit score so you can move into financial adulthood when you don’t have any credit history can seem puzzling. Learn how to maintain good credit health.

Building good credit with your first credit card is a rite of passage in personal financial planning that will serve you well later in life.

Having good credit and a high credit score can help you secure loans at favorable interest rates, whether that's for a car or when you're ready to buy your first home.

Having good credit starts with your ability to get approved for a new credit card and paying off your balance every month. However, if you run up your balance, but can't pay it off or miss a payment, it will be much harder to dig yourself out of trouble with creditors.

Here are some ways you can build good credit and cultivate a favorable credit report.

What is good credit and why is it important?

Credit bureaus have different criteria for what they consider good credit, but generally, having good credit means you're an ideal candidate to receive a loan because you will pay it back in a timely fashion.

Building a strong credit history and maintaining a high credit score (above 700 is considered excellent) can help you qualify for lower interest rate credit cards or loans, as well as higher loan limits. If you're considering renting an apartment, a good credit score will improve your chances.

What impacts your credit?

The two biggest variables that determine good credit are your credit history and your credit score. Credit scores start at 300 and run as high as 850. If you've never had a credit card before, you'll probably be assigned a credit score somewhere in the middle. When you go to apply for an apartment, car loan or even another credit card, lenders and landlords will rely on your three-digit credit score to assess how risky of a candidate you are.

Keep in mind that a credit score is different from a credit report, which is a detailed financial summary that shows how much debt you have, as well as your payment history.

Even if you've never had a credit card, check your credit report to ensure old debts or bills aren't negatively affecting your score. Also, it's smart to check your credit report to ensure someone hasn't stolen your identity and fraudulently racked up debt in your name.

Ideally, you should begin to address any issues before you start applying for credit cards, as any negative information on your credit report will adversely affect what kind of credit cards you'll be able to secure.

You can check your credit score for free on the FTC's Consumer Information website, and you are also entitled to free credit reports from the three main credit reporting agencies (Equifax, Experian and TransUnion) once per year.

Building credit history

If you've already begun to receive offers for unsecured credit cards with low interest rates, low or no annual fees, and other beginner-friendly perks like late payment forgiveness, you're likely well on your way to building a good credit history (which is inextricably linked to maintaining a good credit score).

Remember: The two biggest factors in determining your credit score are your payment history and how much you owe. If you always pay your bills on time and pay at least the minimum (though paying more than the minimum is better), you will be in good shape.

If you are unable to get approved for an unsecured credit card, you might try applying for a secured credit card, which initially functions as a prepaid credit card. With a secured credit card, you provide cash collateral (usually around $300-$500), which becomes your line of credit.

Keep in mind that there will usually be an annual fee involved with a secured credit card, but if your card is properly managed over time, your creditor can increase your line of credit without requesting additional deposits. After a year or so of making the required payments on time, you will likely start receiving unsecured credit card offers.

Maintaining good credit

As a new credit card user, it's important to keep your balances relatively low. Many credit experts suggest using no more than 30 percent of your available line of credit on any single credit card. This can be challenging for anyone, especially new credit card users, but it's important to keep your debt to income ratio relatively low, as this is one of the best indicators of responsible personal financial planning.

To keep your balances as low as possible, consider only using your credit card for small expenses that you know you can afford to pay off within the month.

Three additional factors that affect your credit score to a lesser extent are: the length of your credit history, new credit and the types of credit you're using.

Keep in mind that your credit score can slide off-track if you open or close too many new cards within a short period of time. As new and better credit card offers start to filter into your mailbox, try to resist the temptation to keep opening additional lines of credit. For more information, consider these six additional factors that affect your credit score.



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