Adulting 101: Building Good Credit

Your credit score affects more than just your ability to borrow money. It can also have an effect on your ability to finance your education and can even prevent you from being offered a new job. Learning how to use credit responsibly is crucial to building a good credit history and keeping your credit score in a good range. Here are four tips to follow: 

1)    Start with one credit card. Nearly every store you visit these days wants you to open their credit card so you can get some sort of immediate savings gratification. While those discounts can seem appealing in the moment, opening and using multiple credit cards can get confusing and easily lead to overspending. When you’re first starting your credit-building journey, consider applying for a credit card that can be used at any merchant but request a low credit limit to restrict your spending.  

2)    Never borrow more than you can afford. Just because the credit card issuer set your credit limit at $10,000, doesn’t mean you need to rack up $10,000 of charges if you can’t then afford to pay them off at the end of each month. You’re borrowing money from a credit card company each time you charge a purchase to your credit card. If you pay off the balance due at the end of each month, you’re essentially borrowing that money for free. If you can’t afford to pay the balance due at the end of each month, you’re likely overspending (i.e., living beyond your means) and taking out what could be a high interest loan to pay for your purchases. 

3)    Pay off your credit card in full and on time each month. It seems silly, but have you ever financed your Starbucks run or maybe a DoorDash order? If you used your credit card to pay for these and then didn’t pay off the balance due at the end of the month, then you’re financing your purchase and paying interest on that $5 cup of coffee or $20 DoorDash order, which adds to the total cost. By paying your bill in full and on time each month, you’re proving you have the discipline to only borrow within your financial limitations, which is a responsible way to use credit.

4)    Keep your credit accounts open. Just like being a long-term responsible employee looks good on your resume, having a long-term credit account with a solid payment history can help boost your credit score. Perhaps you have started building good credit history and come across a credit card with a better cash back rewards program. You apply and are approved, so you’re no longer using the original card. Don’t close that original credit card account just yet. The longer the positive payment history for an open account stays on your credit history, the more beneficial it is for your credit score. 

Following these tips for using credit responsibly should lead you in the right direction with building good credit history. With good credit history comes a higher credit score and a higher score typically leads to lower interest rates because you’ve proven yourself as a low-risk borrower.

- Margaret Gooley, CFP®, CDFA®, Worley Erhart-Graves Financial Advisors