Use Discipline To Boost Your Credit
By Liz Pulliam Weston
Q: I am 20 and new to the world of credit. I just received a secured credit card and would like to know the fastest way to build my credit with this plastic. I have been told that the only way to build a good credit score is to spend 70 to 80 percent of my limit, then pay off only a portion of the bill each month. I've heard that if you pay your balance in full, you won't get very much improvement in your score. I'm anxious to build my credit so that I won't need my parents' help when I want to purchase a car and, later, a house. Can you help?
A: You're smart to want to build a good credit history. Having a good credit score - the three-digit number lenders use to help gauge your creditworthiness - will ensure that you get the credit you need in the future.
You'll also pay less for loans because those with good scores get better interest rates and terms than those with poor or mediocre scores. Landlords, insurers and employers may also use credit information to evaluate applications.
But the advice you've been given on how to build a good credit score is dead wrong.
Far from rewarding people who use 70 percent or more of their credit limits, the leading credit-scoring system penalizes those who max out their credit cards. If your goal is to improve your credit score, you typically don't want to use more than about 20 to 30 percent of your available limit.
That might be a pretty small amount because most secured cards give you a credit limit that's equal to the deposit you make with the issuing bank, typically $200 to $1,000. But a little discipline now can pay off later. Make sure you keep track of your purchases, either in a check register you carry for that purpose or by checking your balance frequently online.
There's also no need to pay interest on a credit card to build your score. That's because the credit-scoring formula doesn't distinguish between balances you pay off each month and balances you carry.
What's factored into your score is the balance that your credit card company reports to the credit bureaus – and that is normally the balance that appeared on your most recent statement. If you charged $200 last month, for example, that's the amount that will be reported to the bureaus, even if you paid off the full $200 the day your credit card bill arrived. Because your score doesn't depend on whether you carry a balance or not, you might as well be smart and pay it off in full every month to avoid interest charges.
By the way, you'll want to make sure your secured card reports to the three major credit bureaus so that you're building a history with all three. Also, you'll want the secured card to convert to an unsecured card after 12 to 18 months of on-time payments because unsecured cards are better for your score. If your card doesn't offer that conversion feature, look for one that does.
A few other ways to build a good score quickly include:
- Check your credit reports. Make sure there are no errors, including accounts that aren't yours.
- Pay your bills on time, all the time. One late payment can quickly trash your score.
- Apply for credit sparingly. You don't want to put in a bunch of applications all at once, although you probably do want to have more than one card. Consider applying for a gas or department store card now and another credit card in a year or so. Use the cards regularly but lightly and pay off the balances promptly.
- Consider an installment loan. An auto loan or small personal loan that's repaid according to schedule can help boost your score.
If you continue to make good credit a priority and use the credit you have responsibly, you should be in fine shape for your future.
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Liz Pulliam Weston is the author of "Your Credit Score: How to Fix, Improve and Protect the 3-Digit Number That Shapes Your Financial Future." Questions for Money Talk can be submitted via her website, LizWeston.com, although she regrets that she cannot respond personally to queries. Distributed by No More Red Inc.
