5 Steps to Better Credit

It’s a classic Catch-22: You’ve got to have credit to get better credit. So where do you start? With step one in my five-step guide to building a strong credit record. But it’s not enough just to establish a credit report. When you get credit, it’s important to follow these key steps to net the best possible score: Make your payments as soon as you get your bill. If you push it to the due date, any little snag could cause you to be late — no Internet access, ran out of stamps or got lost in the mail. Making your payments on time is one of the main factors that determine your credit score. A single missed payment can drag down your score, and the incident can stay on your record for up to seven years.

Better to establish and build a credit report for yourself now before you need to borrow money. This will take some time — in order to have a credit score, you must have had credit for at least six months with at least one of your accounts updated and reported within the past six months. Don’t max out your credit cards. Keep your credit card use to less than 30% of your credit limits. So, if your card carries a $500 limit, try to keep your spending below $150 — even on a secured credit card. Not only will this strategy help you to get the best possible rates, it can help you avoid getting in over your head in debt.

One of the biggest myths about credit is that you need to carry a balance month to month in order to build a history. Not so. In fact, credit scores don’t even distinguish between those who carry a balance and those who don’t, according to Consumer Credit Counseling Services. Go ahead and use your credit card each month, but stick to smaller purchases you can afford to pay in full. When it comes to building your credit, a little discipline can go a long way. If you’re starting from scratch, start with opening a savings and checking account. Although they aren’t considered “credit,” these accounts may show up on your credit report. Lenders view savings and checking accounts as signs of stability.

This may seem like irresponsible advice for us to give. After all, the average college student graduates with four credit cards and carries a balance of nearly $2,200, according to a recent study by Nellie Mae, a student loan provider. But credit cards are pretty simple to come by in the ivy-covered halls. Lenders practically beg college students to take cards off their hands. If you can establish a reliable credit history while you’re still in school, you’ll be prepared for when you want to buy a car or a house after graduation. But remember to make those payments on time.

If you simply use your parents’ credit card, your credit history will remain a blank page, no matter how responsibly you manage your spending. Ask them to add you as an authorized or joint user. (Make sure the issuer reports authorized and joint users to the credit bureaus, though. Some only report such users if they are married to the original account holder.) Of course, you’ll want to make sure they really do have good credit because any of their mistakes would then become yours too. Make your payments on time and you can build a solid history. But, again, if you miss a payment, it’s not just your credit that will suffer — it’ll show up on your cosigner’s report as well.