Credit cards are scary and mysterious. Growing up, I was told time and time again to avoid credit like the plague. It was just a tool to buy what you can't afford to then go deep into debt because of it. They didn't mention getting loans or mortgages or starting businesses. They just preached fear.
Fast forward to my college days when I finally see the importance of building credit. I learn that it basically acts as proof that you're responsible with your finances and can be trusted with large amounts of borrowed money. Well shoot, time to get a credit card then. I go to Chase bank to get a student card, but because I have no credit history, they deny me even the student card. So how do I start building credit without credit?!
Several of my friends suggested that I get a retail card and start using that. So I go and apply at The Gap. Denied. Target. Denied. The Gap again, several months later. Denied. One nice perk, though, is that I got a huge discount off of a purchase from The Gap both times I applied... At this point, I was getting nervous since every application to a new credit card can ding your credit score, making it even harder to get accepted.
After much research, I discovered secured credit cards. These bad boys offer you a chance at building credit with some severe limitations: tiny spending limit, massive interest rates, and a cash deposit to the bank. This was my last hope, so I got things in order and got my Capital One card. Then, several years after that, I upgraded to the Chase Freedom card - a real credit card worth using.
At this point, I had a light credit history, but I still had an aversion to using credit. Over time, I nearly stopped using the credit cards altogether and relied on my real cash in my checking account. Mistake number one.
After having the Chase Freedom card for a couple years, I saw it fit to cancel my secured card and get my cash deposit back. Mistake number two.
Now, after many mistakes and missteps, I have done my research and will share with you what I should have done and what I'm going to be doing from here on out.
Step One - Start Young
Coincidentally, getting your first credit card is easier when you're young and less responsible. Ideally, you can snag one in high school and start using it monthly for little purchases. The longer your credit history, the better.
Step Two - Maintain a Healthy Balance
It’s best to use no more than 30% of your credit limit at any time in the month. If you approach or pass your limit, you're seen an irresponsible with your money. On the flipside, if you use 0% of your limit, there’s no proof that you’ll be good with the money that’s lent to you.
Step Three - Automate!
This is the step I'm working on for myself right now. I have set up my credit card to be paid in full every time a due date comes around. I have also set up several of my recurring monthly fees to come out of the credit card. This includes Spotify Premium, health insurance, Adobe Creative Cloud, and a couple others. These amounts will total about 30% of my limit every month. Even better, I’ll get 1% cashback on all these fees. It’s win win!
Step Four - Diversify
Now that we have a steady flow of cash going through our credit card, it’s safe to open another card to use for another purpose. Having multiple cards shows the lenders that you can manage multiple cards responsibly. You might want to get a card that has a large cash back bonus for grocery stores. Or another that gives 3% cashback on all Amazon purchases. This not only builds credit, but gives you rewards for doing so.
Step Five - Don't Cancel
One of the biggest mistakes that I have done with my credit is cancelling my first secured credit card. Because of this, I lost the first several years of my credit history just like that. So even if you rarely, if ever, use your first credit card, hold on to it as long as possible. It’s more valuable than you might think.
If you're able to do all of these things for many years, you should be sitting pretty on your lengthy and steady credit history.
Disclaimer: all of this information is from my own research. I'm sure there are different and better ways of doing a lot of these things, but this is what I have come up with.