Best way to start building your credit

Building credit and maintaining a good credit history are key steps towards building your financial future. At first, credit may seem frustrating — you can't get credit because you’ve never had credit. But there are actions you can take to start establishing a strong credit history.

Why you should establish credit

If you've always paid with cash or checks to make purchases and haven't used credit, it's a good idea to start. And if you’ve had credit problems in the past, it’s important to re-establish your credit history for a few key reasons:

• You may need good credit for such routine matters, such as having utilities connected to your home.
• Good credit is important to secure financing when buying furniture, a computer, a car, or even a new home.
• Employers may check the credit rating of prospective employees.
• Renting an apartment may be easier, as a good credit rating tells landlords that you are a person who's more likely to pay the rent on time each month.
• If you need a loan, banks may look more favorably upon you if you have a good credit history.

How a credit card can help

A credit card may be a good way to start building credit. You can use your credit card to make purchases, and they are very convenient. One way to start a credit history is to have one or two department store or gas station cards. They allow you to:

• Buy online or over the phone where cash may not be an option
• Make travel reservations, purchase airline tickets, and rent cars. Car rental companies may require a hold or deposit if you do not use a credit card.
• Shop more safely by not carrying a lot of cash
• Budget larger purchases by paying in installments
• Access funds for emergency needs

Ways to manage your credit history

Once you start using credit, it’s essential to manage it properly. So use your credit card to make purchases, but don’t go over your credit limit or let your balance owed get too high to manage. Pay at least the minimum payment due each month, or more if you can, and make sure you pay on time. The best way to reduce the interest owed on a credit card is to pay off the balance as quickly as possible. Otherwise, it may take many years to pay off even a small credit card balance if you only make minimum payments. If you follow these tips, you may build a strong credit history that will help you meet your financial goals.

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4 key credit moves for 20-somethings

What you can do now to boost your credit score and build the foundation for your financial future

Credit is an important factor when buying a car, renting an apartment and getting the best insurance rates. But building a solid credit history takes time. Establishing good habits early on is key to helping you reach your personal and financial goals later in life.

Here’s a look at four important steps that can help you build a solid credit history.

1. Pay your bills on time and in full

Payment history accounts for just over a third of your credit score. Credit scorer FICO recommends that you always pay your bills on time to avoid late fees and negative marks on your credit report. While credit cards and loans almost certainly appear on your credit report, other billers, such as utilities and cell phones, sometimes report payment histories too (especially if you’re late paying). So paying on time is important for all your bills.

Ideally, pay off the balance in full each month to avoid paying interest charges. But if this isn’t possible, be sure to pay at least the minimum amount required every month. And if you can pay a little more than the minimum, it can save you on interest costs in the long run.

2. Consider tools to help establish credit

If you have trouble getting a credit card—and that may be the case if you haven’t had access to credit—there are a few options that could help get you started. Some banks offer credit cards designed to help students establish credit, so look around for cards that are made for student use. Also, consider a checking account. While this won’t necessarily help you build credit, having a good relationship with a financial institution could help you get a loan down the line or even your first credit card.

You might also consider a secured card. With these cards, you make a security deposit in advance for the amount you want to borrow. This gives the bank collateral—something the lender can use should you not make your payments. Timely payments on a secured card can help you qualify for an unsecured credit card with a larger credit line.

Another option to build credit: If you have a parent or other family member with good credit who’s willing to make you an authorized user on his or her account, doing so can help you develop your credit history.

Lenders don’t like to see you use all your available credit, even if you pay it off each month.

3. Don’t use all your credit

Lenders don’t like to see you use all your available credit, even if you pay it off each month. Try to keep your borrowing below 30 percent of your total available credit. This is called your credit utilization rate.

Understanding available credit

If you spend

$2,500

you’ve used 50%

If you spend

$1,000

you’ve used 20%

For instance, if you have a credit limit of $5,000 and your charges total $2,500, you use half your available credit for that card. If your balance is $1,000, you use 20 percent.

4. Check your credit once a year

By law, once a year consumers are allowed to check their credit reports for free from each of the three credit bureaus. Some credit card issuers also give you a copy of your credit score for free. This is a good opportunity to make sure your issuers correctly report to the credit bureaus and to check for any fraudulent activity.

Using credit sensibly early on—by keeping tabs on your credit report and paying your bills on time—can help open doors for you financially and professionally. Develop strong habits now and see where your future takes you.

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