Building a credit might seem like a mystic and obscure ritual that only a few of us are capable of performing through tremendous sacrifice. Of course, that’s misconception stems partly from ignorance and partly from laziness. Maybe you simply haven’t seen the necessary information written in everyday language and you don’t feel motivated enough to do the proper research while you’re occupied with your student life.
Here are different variables that are used when credit bureaus calculate credit scores and let you know what you can do to work on all of them as a laymen. To say it the simplest way, your credit score is a numerical representation of your financial history and the measure of your trustworthiness for potential lenders. We can debate whether it’s appropriate to use a single number to determine someone’s life and future, but that’s simply what happens every day.
First thing that is measured in your credit score is how diligent are you in paying your bills for the credit lines you have. The keyword here is, not surprisingly, credit. This means that having debit cards or paying your utility bills won’t help you, because you’re making payments using your own money not credit that some third party extended for you. A good way around this is deciding that you’ll pay for certain purchases, that you’d make anyway, such as gas or groceries, with your credit card, and then setting up automatic payments on your debit card to make sure you make credit card payments for the items you bought on time.
Length of credit history is something you can’t work on overnight. First credit card you open will usually have low limit and not too many perks, but ideally you should never cancel it. Having one card will increase your credit score a bit, which will allow you to acquire another one, preferably with better terms. The average age of all your open credit lines is taken into consideration, so it doesn’t make sense to keep applying for and then cancelling your cards all the time. It’s also important not to mess up with payments on your starter card. A good way to always stay on the safe side is acquiring a secured credit card that is popular with many banks. It’s a card that requires you to make a certain down payment, which will be used to determine your limit. You should use it like any other credit card and try to make timely payments on it, but in case you miss one, it will be taken from your deposit, so your credit record remains unblemished.
Diversity of your credit lines is also something you need to build gradually. Don’t try to rush and take loans just to have every type of credit available. This counts for 10% of your score, so potential risk of badly managing some of too many credit lines you have is huge compared to the impact it has. Go slowly and aim slightly bigger every time. First get one credit card, then the one with a bigger limit, maybe a small loan for a car that you’re sure you’ll repay. Student loans are also a necessity, but unfortunately, sometimes you’re not able to wait until your credit score improves to take them.
Make sure to keep the amount you actually owe at every single moment to under 30-35% of what you could owe (what your limits are). Aim way less, of course. Don’t max out on all your cards all the time, in layman’s terms. Such situations would signal to the potential lenders that you tend to spend without planning too much ahead, and you don’t want that.
The keys are moderation, planning, patience and common sense. Don’t expect results over night and don’t obsess over anything too much. As long as you’re not making any stupid decisions, your score will slowly increase.