5 Steps to Building and Maintaining Your Credit Portfolio
- If you don’t have credit, start small. A lot of major credit card companies won’t give you a card until you establish credit for yourself. Start your credit portfolio by applying for one or two store credit cards. TJ Maxx and American Eagle have great in-store credit cards and are very friendly to newcomers. Interest rates on store cards are very high - do not forget to pay store cards in full each month.
- Make small purchases that you can pay back immediately. Use each of your store issued cards to make small purchases and then pay them off as soon as you get home. Credit cards are tricky – if you look like you need credit, you won’t get credit. That’s why people apply for credit when life is at its best. Paying down your new accounts quickly will demonstrate you are a responsible and solid credit customer.
- Six months to one year later, apply for 2 major credit cards. Major credit cards are Visa and MasterCard; they’re offered by many lenders so consider who the lender is in your decision. A major bank or credit union is a better lender than some unknown company. The Discover and American Express credit cards are only issued by their respective companies. Most credit card issuers offer student cards that are easier to obtain but they are often more restrictive and carry high interest rates that don’t come down when you graduate. When you apply for major cards don’t list your student status; try to qualify for the card based only on your income and newly established good credit. This will save you interest in the long run. Scrutinize those interest rate offers and apply for the cards with the most favorable rates. Don’t take any of the add-on features you’ll inevitably be offered with the card as they are expensive and rarely worth the money.
- Again make small purchases you can pay back immediately. Use each of your new major credit cards to make small purchases and then pay them off as soon as you get home from shopping. Demonstrating your ability and willingness to make your payments on major cards will also boost your credit score.
- Take out an installment loan for a car or other big ticket item. The calculation of your credit score is based on several factors, one of which is the diversity of your credit portfolio. Credit cards fall under the category of revolving loans because you can borrow the same amount of money over and over (like a revolving door lets you go in and out over and over again). Installment Loans (the kind you have to make an application for each time you wish to borrow) is granted for a specific item. Once the loan is paid off, your business with that lender is finished until the next time you apply for a loan. Student loans, car loans, loans to take vacations, and loans to purchase musical instruments fall into this category. Taking out a small installment loan and paying it back as agreed will increase your credit score.
Tips for Building and Maintaining a Stellar Credit Portfolio
- Don’t use your cards for everyday purchases. Tuck all but one of your major credit cards into a safe place at home. Keeping your cards out of your wallet will force you to think about purchases you’re planning to make before you go shopping. Keep one major card in your wallet (along with your checking card) to give you what credit cards are meant for – a quick loan in an emergency.
- Don’t max out your card. Never charge your card above 50% of the line of credit you have been granted (some people recommend 35% but that is pretty conservative). A maxed out card is an indicator of financial stress so maxed out cards will result in companies refusing to grant you credit (or lowering your current credit limit) and your credit score may plummet.
- Make all of your payments on time. On time payments go far in building your credit portfolio. They indicate you’re both willing and able to afford your credit.
- Use your cards. Credit cards can be confusing. You have a line of credit but you can only use about half of the credit granted. You should keep your cards tucked away so you aren’t tempted to use them. But you need to use your cards or they can go inactive. Here is a suggestion. Keep track of when you use your cards that are tucked away. Take them out once every three months and use them to do something you were already going to do (e.g., go to movie or to dinner) and then pay the card off the minute you get home. Using your cards each quarter will keep your cards in active status while paying them off immediately will keep your credit score strong.
- Never close the first major credit card you open. Part of your credit score is predicated on the length of time your oldest card has been open. Keep that first card even if you don’t particularly care for the company issuing the card. One of the reasons we suggested you open two major cards to begin with (although you will only tuck one into your wallet) is so that you can close one of the cards in the future if you really hate the company – which happens.
- Never ever, ever borrow the cash advance available on your cards. Credit card companies will provide you a limited line of cash credit that you borrow against your card. This is called a cash advance. We won’t even tell you how to take a cash advance because it works against you - it is a major red flag to the company that you are cash strapped. They will send you checks; destroy them. They will call you; ignore them. Borrowing cash from a credit card comes with higher interest rates and very expensive penalties. They also start charging you interest the day the cash touches your hand (instead of waiting to charge you interest until the next billing period like other charges) – then they destroy your standing with the company.