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New year and new beginnings, building good credit gives you opportunities and expansions into things you wouldn’t be able to do yourself. Using credit properly is a tool. The best example I like to give is fire. You use fire properly and you have warmth and comfort. Use it wrong and you can get hurt by burning yourself. People avoid credit because they’re afraid of being in debt. Truth is you need good credit if you ever plan to buy a car, home, or start a business in the future.

Having a good score also gives you access to benefits like lower interest rates, better loan terms, and most importantly premium credit cards and their perks.

Time

The #1 factor to credit score is time. The longer you have a history the easier it is to get loans and apply for new credit cards. With time comes payment history and account age, which are the two biggest contenders for a FICO score.

How can I prove I’m a good borrower without a history?

Start off with secured credit cards. With these cards you’ll give a collateral. Typically the collateral will be your line of credit. The credit card company will hold the collateral for about a year. After the year ends your credit card becomes unsecured and you get your collateral back.

If that doesn’t work for you can always be an authorized user for someone else’s credit card. For example ask your parents or trusted family to add you as an authorized user for one of their credit cards. They don’t necessarily need to give you access to the card but keep in mind if they are irresponsible with their spending they can drag you down with their debts since they might show on your credit report.

Once your secured card becomes a regular credit card, you will have a solid history and payment history. If you pay it off in full every month you should be well on your way for your next card. Keep in mind every time you open a new card your length of credit history will go down. The scoring system uses an average age of credit to determine how long your history is. This can cause your score to drop. Another thing to keep in mind is if the card you are applying to does a hard credit inquiry this can also cause your score to drop. Don’t worry if it does this will just be temporary and if you get approved this can be more beneficial for you in the future.

After that you can progress to reward cards. These are general cash back cards, for example the Discover IT or Chase Freedom. These are general spending cards which reward every purchase with a general % for example the Discover IT is 1% and Chase Freedom is 1.5% cash back on general purchases.

Ratios

The Second biggest FICO score contender is amounts owed. I call this ratios because it’s based on your credit limit. For example if you owe $500 and your credit limit is $1,000 you are using 50% of your revolving credit limit. You can lower these ratios by having more accounts open. You can also lower the ratio by having larger credit lines. For a healthy credit score it’s recommended to use below 30% of your credit limits but the lower the better.

I proved I’m a good borrower what’s next?

Lower your ratios! If you have had a card open for a while and max it out but pay it off in full every month, sometimes based on your spending habits your credit card will automatically give you a larger credit line. If that doesn’t work you can always apply for a larger credit line online or by calling. Keep in mind that income you report for your credit card is different from your actual income. If you’re over 21, you can use your spouses’ income for example and add it together or if you live with your parents use their incomes to boost your credit limit. So if you earn $60k a year and your spouse earns $80k a year you can report a $140k income. Use good judgement though this is supposed to be income that can be reliably accessed to pay back your card. If realistically your parents won’t help you pay your cards you shouldn’t include it.

Maintenance

Keeping track of all your accounts and how much you owe is a good way to keep your credit score healthy. Make sure you’re making AT LEAST your monthly payments and most importantly keep your accounts OPEN.

I have multiple accounts with age and good ratios, now what?

At this point you should have a decent credit score. Keep in mind that small things out of your control will probably affect your score. For example if you open another new account or made a big purchase and the balance got reported to the credit bureaus. These things are temporary and shouldn’t really stress you out about your score. One important thing is to keep older accounts open since these are your biggest winners. Keep in mind that if you keep a card inactive for too long the bank or credit company can close your account. They might warn you a few months before they do. This can drastically hurt if it’s a card you’ve had for a while since this will tank your overall credit age therefore hurting your score.

A good tip is to pay a subscription service with it, then have autopay enabled on your card to pay the statement balance every month. That way your card will stay ‘active’ while being passive.

Significance

Open new accounts with purpose. Don’t just open a new credit card because they will give you a free lip stick. Open a card you plan to use frequently and with good benefits. Keep in mind a majority of GOOD premium credit cards have annual fees. These fees will 99% of the time get offset by the benefits and rewards they provide. If you stop using the card you will be stuck paying the annual fee. And remember closing your account affects your account age.

If you are in a dire situation where you have a card with an annual fee and you don’t really use anymore. There are options before you decide on closing the account. Some cards have what I call the ‘little brother’ version you can always downgrade to that version of the card while keeping your credit history. An example would be Chase Sapphire. If you stop using your Chase Sapphire Reserve which has a yearly fee of $550, you can downgrade it to the Chase Freedom which has no yearly fee. Not many people know about this option but you can do the “product change” and keep your precious credit history.

Bottom Line

Now that you know how to start your credit journey. You can maintain it healthy and an excellent credit score will come with time. Just remember to make your payments on time and keep your ratios low. Credit scores will fluctuate a lot so don’t worry about the little things, but control the things you can like making your payments or paying balances down on time.

Thank you so much for reading and see you again next Sunday,
– Pablo