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How To Start Building Credit

Getting Started With Your First Credit Card

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Although credit building is a slow process, it is a necessary one. Credit can be used to assist in major purchases such as buying your first home, and even a much needed vehicle at times of need. Establishing a good credit history not only helps you qualify for loans and better interest rates, but it is a signal to lenders that you are financially responsible. Thus leading to more buying power. 

What is Credit?

Credit is a debt obligation which allows an individual to purchase goods or services under the agreement to pay the debt back to the lender. Credit provides the flexibility to make purchases upfront while spreading the cost over manageable payments. For example, if you want to buy a used vehicle for $5,000 but only have $1,000 available, you could still proceed with the purchase by securing a loan. The loan, supported by your credit, would allow you to cover the remaining $4,000 and repay it in installments over time (with interest).

Types of Credit

There are three major types of credit: Revolving Credit, Installment Credit, and Service Credit.
Types of Credit

Revolving Credit

Revolving credit allows you to borrow money up to a set limit and pay it back over time. The available credit replenishes as you repay your balance, meaning you can borrow again without reapplying for credit. A credit card is a common example of revolving credit.

Installment Credit

Installment credit involves borrowing a fixed amount of money and repaying it in regular installments over a specified period. Mortgages, auto loans, and personal loans are typical examples of installment credit.

Service Credit

Service credit is a type of credit that allows consumers to pay for services after they have been provided. Utilities, phone bills, and other monthly services are examples of service credit, where you're billed for usage and pay at the end of the billing cycle.

Opening a Credit Card

By opening your first credit card, you will be able to begin the process of building a positive credit history in one of the more accessible and effective ways. Here’s how to get started:
How to Open Your First Credit Card
Choose the Right Credit Card
Start by selecting a card that fits your needs. If you’re a student, look into student credit cards that often come with benefits like no annual fees and simpler approval processes. Always aim for a card with no annual fees if possible, and consider cards with low interest rates. Be sure to review the reward programs and any added benefits.
Review the Terms Carefully
Before applying, read the card’s terms closely. Pay attention to the APR (Annual Percentage Rate), fees, and grace periods. Understand what the card will cost if you carry a balance and how interest works. The fine print is important for managing your credit successfully in the long run.
Apply for the Credit Card
Once you've chosen your card, it’s time to apply. Be prepared for a hard inquiry on your credit report, which can temporarily lower your credit score. To avoid this impact, only apply for one card at a time. You’ll need to provide personal information, including income and Social Security details.
Activate Your Card and Download Monitoring Apps
After receiving your card, activate it according to the instructions provided (either online or over the phone). To keep track of your spending and monitor your credit usage, download your card’s associated mobile app and enable notifications. Also, consider downloading a credit monitoring app such as Credit Karma to help you stay updated on your credit score and potential changes to your credit report.
Use Your Card Wisely and Build Credit
Make small, manageable purchases and pay off your balance in full every month to avoid interest charges. Always pay on time to build a positive credit history. Keep your credit utilization below 30% of your limit for the best impact on your score. Regularly check your credit score to see how your responsible usage is benefiting your financial future.

What is Credit Card Interest?

Interest is the cost of borrowing money. A credit card’s interest rate is determined in the terms of the contract, typically expressed through the credit card’s APR (Annual Percentage Rate). You will typically get an interest charge on the remaining balance owed if you fail to pay the balance in full by the due date. For example, if you spend $100 on your credit card and only pay the minimum balance of $20, interest will be applied to the remaining $80. This interest will continue to accrue and be carried over into the next billing cycle, increasing the total amount you owe over time. You can avoid interest payments by paying off your debt early.

Credit Card Disclaimer

Remember, when using a credit card, you are borrowing money with interest. You are required to pay back all funds borrowed. It is not free money. Failure to repay these debt obligations can result in serious consequences such as damage to your credit score, late fees, increased interest rates, and even legal action. Always ensure that you can repay the amount you borrow to avoid these financial penalties.

Frequently Asked Questions

Frequently Asked Questions

You can start building credit as soon as you turn 18, or even sooner if you become an authorized user on someone else’s credit card.

The best way to build credit is by using a credit card or loan responsibly. Pay your bills on time, keep your credit utilization low, and avoid applying for too many credit accounts at once.

An authorized user is someone who is added to another person’s credit card account. As an authorized user, you can use the card, but the primary cardholder is responsible for the payments. However, if payments or debts are ever mismanaged, it can affect the primary cardholder as well as the authorized user.

Yes, student loans affect your credit score. Timely payments can help build your credit, while missed or late payments can harm it.

To get approved for a credit card, make sure your credit score is in good standing and that you have a steady income. If you’re new to credit

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