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How to Build Great Credit

Personal Insights

Building a solid credit history is essential for anyone who hopes to be able to own property, obtain favorable loan rates, and have more employment options. For young adults, the conundrum has always been that you need credit in order to build credit, and it is not always available when you’re first starting out. Building credit takes time, and it requires a conscious effort to manage it effectively. When building credit, it’s fairly easy to take a step forward and then have one small mistake put you three steps back. The fastest way to build credit is to always be aware of the five categories of credit scoring and conduct your credit activities accordingly.

Create a solid payment history

Even if you start out small, with a low limit credit card, or even a secured credit card, making on time payments is the biggest factor in scoring your credit. When you apply for a credit card or a loan, make sure the creditor does report your payments to the credit bureau. When you do get a credit card, use it often, and pay it off each month to ensure that your report indicated a constant history of payments.

Don’t max out your credit

Remember your debt-to-credit-limit ratio. To maximize your score you need to keep that under 30%. 0% is better. After establishing your payment history, you should be able to obtain additional cards. Your goal shouldn’t be to use more credit; rather it should be to build up your credit limit while keeping your balances low.

Length of credit history

If you’re just starting out, there is not much you can do about this. Depending on the type of credit you are trying to obtain, even a six month history can suffice. But, when you apply for loans, such as a mortgage or a car loan, lenders usually want to see a longer history. Be patient.

New credit

Again, not much you can do about this, because all of your credit accounts will be new in the beginning, and eventually they will become mature accounts. Eventually, your credit score will reflect that. The real concern should be when you do have mature accounts, the number and frequency of new accounts you obtain at that point.

Credit mix

Starting out, you may need to open some credit accounts with finance companies, such as when you buy furniture or appliances on installments. While these aren’t considered to be the crème of the crop in terms of quality of credit, they can at least help you establish a payment history. Later, you will want to limit or eliminate the use of this type of credit.

The views expressed herein are those of Small Business Resources, as of the date above and are subject to change. This publication is for informational purposes only and should not be construed as a recommendation for any specific insurance product or service. Information has been collected from sources believed to be reliable, but has not been verified for accuracy. These views and opinions do not necessarily represent those of Bryn Mawr Trust, its directors, officers, affiliates, and/or any/all of the contributors to this site. It does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not endorse any third-party companies, products, or services described herein and assume no liability for your use of this information.

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