As a beginner building your credit it can be a daunting task. It is all so new and you don’t have any experience. So my hope is that the information found on this page will be helpful and ease your mind about starting to build your credit.
Building credit as a beginner starts with you and the habits you have or the ones you want to develop. When I was a young kid I worked in Mr. Phillips general store, cleaning and taking out the trash. One day Mr. Phillips got these shiny new bicycles and I wanted one so badly. He told me I needed to have a credit score to get one. So I went home and asked my mother for the credit score so that I could get that bicycle. She told me that I would need to build my score, none was going to give me one. I was confused to say the least.
She told me to think of it as this magic number that grows when you make payments on time. She gave me an old card (it was pretend) and she told me that I could use it to buy small things like snacks (she kept a lit) and I would have to pay her back every month on the snacks I purchased with the card. So when I got my pay from Mr. Phillips I put in a jar and at the end of the month I paid her the total amount due.
I would get my snacks without paying from them until the end of the month which I thought was a great idea. I wanted to make my Mom proud and I wanted the bicycle. So when I did make my payments, when promised I was able to buy more things as long as I paid her back at the end of the month.
She taught me that if I wanted a bicycle I had to prove that I was responsible and I would be able to make the payments. She told me over time I would see my credit score increase and i would be able to purchase more. She told me that this is how credit works in the real world. She said small choices make your score magic grow!
Why does credit matter
Do you have a desire to own your own home or purchase a new car? If you do then this why credit matters because in order to purchase a home or own a car you will need a good score of 650 and higher. Your good score will allow you to gain access to loans and credit cards with better terms and at lower interest rates. A strong credit history can also help you qualify for a home or a rental apartment, it can also be a factor in some employment decisions, and may even result in lower insurance premiums.
Your score is often checked to get you approved for major loans like a mortgage or car loan, and if you have a good score it can save you thousands of dollars in interest over the life of the loan. Landlords uses your score to determine if you are a potential tenant and is a reliable borrower. A poor score can prevent you from getting an apartment or may require a larger security deposit. These are some of the main reasons why your score matters.
Understanding Your Credit score
I have found that when you understand what makes up your,score, you have a tendency to build credit faster.
- Credit Mix equals 10 percent of your score. Your score is better when there is a variety of accounts such as installment and revolving credit lines.
- Credit utilization equals 30 percent of your score. Credit review your report to see much of your credit limit do you use.
- Length of history equals 15 percent of your score. The older your accounts are or the longer you had had the accounts open works in your favor. It will equal better scores.
- New Accounts Credit equals 10 percent of your score. Keep in mind that too many new applications can make score drop. As the new accounts will cause credit inquiries that will cause lower scores. The inquiries will take approximately two years before they come off of your report.
- Payment History equals 35 percent of your score. Make sure that you are paying your bills on time.
Step 1 – Pull Your Free Credit Report to find out where you stand. Go to AnnualCreditReport.com. You can also use sites like CreditKarma or Credit Wise to check and monitor changes to your credit profile for identity errors as well. This will allow you to track your progress.
Step 2 – Select Your First Credit Building Tool. You might want to look at a secured credit card. With a secured card you deposit anywhere from ($50 – $300) your deposit is refundable. The amount you deposit on the card is you credit limit. Use it as you would a normal credit card. Check out Discover Secured, CapitalOne Secured and your local credit unions are all good places to start.
Step 3 – Credit Builder Loans offered by Credit Unions. The credit union loans you money however they hold it in a savings account. You make monthly payments and when you are finished, you get the money back and the positive credit history. Sounds like a win win.
The right way to use your new credit
Using your credit the right way actually builds you into good status. Remember I said that your credit usage is limited to 30 percent of your score. So make sure you keep your usage under 30 percent. For example if your limit is $300, try not to have more than $90 on that card. Also pay your bill in full every month otherwise your interest becomes wasted money.
You can start by making one small purchase on a weekly basis. Some examples you might consider is gas for your car, groceries from your local grocery store or paying your streaming account like Netflix or Prime Video, then pay the bill in full, pay it off. You can even set up autopay that way you do not miss a payment. If you miss a payment you score drop instantly.
Your 3 – Month Building Plan
Month 1: Get setup
- Open a secured card or a builder loan
- Set it Up on Autopay, you do not want to miss a payment. This critical!
- Make a small purchase per week keeping your usage under 30 percent
- Don’t be obsessive but do monitor your it
- Bureaus like Experian, Equifax and TransUnion start reporting within 30 to 45 days
Month 2: Build Your Momentum
- Make sure to keep your purchases light and consistent
- Never make your payments late. Can’t emphasize this enough!
- If you can, start to add your rent to your reporting
- This month you should see your first score
Month 3: Strengthen Your Profile
- Keep your usage low
- Add a second reporting account, maybe an installment account
- Make sure to avoid applying for multiple new cards.
- For most beginners you will start to see a score between 580 and 640 during month 3
Avoid these common mistakes
Buy here pay here places usually do not report your activity to the credit bureaus
Using your entire credit limit every month can cause a lower score
Paying late even one late payment can cause your score to drop for a long period of time
Keep your older accounts open for as long as possible, do not close them too early. It also affects your score
Here is a realistic timeline for your growth:
First 3 months 0-620
6 to 12 months 620-700
1 to 2 years of consistent use 700 to 750
This gets faster and easier over time with consistency, no late payments and keeping you usage below 30 percent. As a beginner you will gain experience in what works for you and you will be able to monitor your progress every step of the way.
As you grow on your journey to a score of 700 and above you and all of your wisdom will be able to help others in your inner circle to do the exact same thing. Imagine being able to help a close friend or family member to boost their scores based on the information you have learned here.
We Help you start Smart
I teach this method to all of my five grandchildren, so that they have insight on what, where they can go with good scores that have been derived over time. They see the value in developing and maintaining consistency when building their scores. This also teaches them how to manage their day to day lives. Giving them the confidence that developing and maintaining good scores is a sign of growth from within. It is long lasting.
When they are of age they will be able to acquire that loan or credit card or whatever because they have this skill that most find to be hard to conquer. However as you can see it is not. So there is no need to let this continue to be a daunting task. Getting that first apartment will be easier than they thought, because they opened the secure card and made small purchases and paid them off in full every month consistently. They will add their rent to the reporting. Small, steady actions over the first 90 days can open doors, lower costs and give you real freedom and not to mention a piece of mind.
In conclusion You need consistency to Build Your Score, so not just money. Most of us think that building credit means you need big purchases, that you need to carry debt or be a co-signer for someone else. Well you don’t a small charge like as or your streaming account hat you pay on time can help you build excellent credit faster than you think. Try to stick with the three month plan and create a strong financial foundation no matter who you are and where you live.