The best time to plant an apple tree was 10 years ago; the second-best time is today! The same is said about building credit. The best time to build your credit was as soon as you turned 18 and you were eligible to get approved for a credit card. (See Getting Approved For A First Credit Card.) If you did not start then, though, then please go ahead and start now, since the faster you start, the faster you will be able to build your credit.
There are many people I know that although they started building credit a long time ago they still don’t have a perfect credit score. This is 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 Credit Cards Open
There are lots of great credit cards out there which offer you 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 probably will not be worthwhile for you to keep it 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 these cards open for as long as you live, without ever having to worry about the annual fee.
One of the big mistakes that people make is that they keep open their cards 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 in a year from now, won’t have any recent activity and the card will be marked as closed. Therefore, Fico will almost not count it in their scoring model, leaving you with a much lower score then what you deserve.
Keeping Your Old Account Active
Fico will only, or almost only, include in their scoring model cards which are active. Therefore, even you have a credit card that is 10 years old, if the card is lying around in your drawer and not being actively used, then this 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 to my office to help them improve their credit, and when reviewing their report I find that they did not use 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 three or four 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).
Good luck on building credit and remember to check out our credit cards page to find the best credit cards for you there!