There are many people that often complain to me that although they started building credit a long time ago they still don’t have a perfect credit score.
Usually, the reason ends up being because they never set themselves up to build credit properly. In this post, I will teach you how to set yourself up to build credit properly, because once you’re doing it you may as well do it right.
Keep your oldest credit cards open
There are lots of great credit cards out there which offer many good perks, either for travel or for shopping, but they charge you a fee every year to keep the card open.
Although it might be worthwhile for you to pay the fee now, it may not be worthwhile for you to keep the card open in the future. When starting out, I always recommend that the first three credit cards you apply for should be credit cards that don’t have an annual fee. Like this, you will be able to keep those cards open for as long as you live, without ever having to worry about the annual fee.
One of the big mistakes people make is that they keep their cards open for, let’s say, two years. Then they close them and apply for new ones. This practice will never let you build proper credit since the old accounts, even if they will still be on your credit report (for up to 10 years), won’t have any recent activity and the cards will be marked as closed. Therefore, Fico will (almost) not count it in their scoring model, leaving you with a much lower score than what you deserve.
So remember, in order to build proper credit history make sure to never close your oldest three credit cards.
Keep your oldest credit cards active
Fico will only, or almost only, include in their scoring model cards which are active. Therefore, even if you have a credit card that is 10 years old, if the card is lying around in your drawer and not being actively used, the card will be cut out of the Fico scoring model, which will ultimately cause your score to drop.
I see this all the time. People reach out for advice on how to improve their credit, and when reviewing their report I find that they have not used their credit cards for the past 6 months! (Sometimes they explain that their mortgage broker told them to stop using their credit cards. !?!) All the advice I give them is to just start using their credit cards again….. and Bingo! Their score shoots back up!
Having a few credit cards
It is important when you start building credit, not to have only one credit card. It is actually recommended to have two or three credit cards. This is because in order to build credit properly, scoring models will want to see that you’re able to juggle multiple credit lines. Preferably, if possible, open different types of trade lines. This will help you with your credit mix. For example, leasing a car or getting a mortgage will help you build credit even faster. At least make sure you have a few credit cards, and as mentioned above, choose cards that don’t have an annual fee (you can find some here).
For your first three credit cards, choose cards from different banks so just in case one bank shuts you down, you don’t lose all your oldest credit cards at the same time. As the saying goes, “don’t put all your eggs in one basket”.
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Good luck on building credit and remember to check out the Ultimate credit cards finder to find the best credit cards for you out there!