Building credit for the first time is definitely a marathon, not a sprint. But even just figuring out the first steps of this journey can seem very daunting. There’s tons of resources and tips out there to help you start building your credit, but so much information can seem overwhelming. So here’s 5 steps we recommend to get you started on a path to financial stability.
“I feel like I’m the only one who doesn’t know how to build my credit!”
You’re definitely not! American society is uniquely dependent on credit in ways that many other countries and cultures around the world simply are not. Despite that, financial literacy is at an all time low in the US, with America ranking 14th against other countries. The truth is that financial education is handled unevenly across the States. What you know, or how much you know is impacted by a dozen factors including where you went to school, if you were born here, or the income of your family as you grew up. Despite the growing interest in financial literacy, only about 1 in 4 teens attending school will actually receive formalized financial education, and only half of adults passed a financial literacy test. That’s why we’re trying to make credit education and building easier with blogs, resources and apps!
Step 1. Check to see if you have a credit score
First things first, let’s see if you have a credit score! If you live in an Esusu building, the Esusu App has a credit score checker for free, and there’s other websites like CreditKarma who can also look at it. Knowing what your credit score is to start with helps you plan long-term what next steps you need to take. And if you don’t actually have one yet, that’s okay! About 1 in 10 americans also don’t have one, which is called being “Credit Invisible”.
Regardless of whether you have a score, or it is low or high, you can still take the next steps to building your credit. Each of these steps is tailored to help build healthy credit habits.
Step 2 . Apply for starter credit cards
The next step is to actually open a line of credit if you haven’t already. For beginners, these credit cards frequently have really low credit limits. Or in other words, because banks aren’t sure about what kind of borrower you will be yet, they may only allow you to spend a few hundred dollars on the card, or may require an initial deposit into a savings account. And that’s okay! The goal here is to start building history. A factor of credit scores is the age of your accounts. Of course, if you’re just learning how to build your credit, most likely most of your debt is very young. But as the saying goes, the best time to plant a tree was 30 years ago, the second best time is now.
Step 3. Open a Savings Account
We did touch on this in the step above, but the next best thing you can do is open a savings account and deposit a little each month or paycheck. Even $5 or $10 each month will slowly build up. Once again, we’re showing credit companies that you have money to put away, and building that all-important history.
You’ll want to look for the savings account with the highest interest rate. Each month that you keep your money in the account, the bank actually pays you a small percentage of that total amount. So in this case a higher interest rate is good, since each point means you get a little more each statement date.
Step 4. Set reminders for your payment and statement due dates
Paying your credit cards on time is one of the highest weighted factors on credit scores. This means always knowing when things are due by using a calendar or app is very important. Don’t rely on your memory alone- if life gets busy, you may forget. However, what a lot of people don’t realize is that there are actually two important dates when it comes to banks and credit cards.
The first is your payment due date. The payment due date is the one most people already know about. This is the day that your minimum payment is due on your credit card.
The second is your statement date. The statement date is the day that the credit company or bank actually records and reports to the credit bureaus about your balance and utilization.
Here’s a great video from Ashallaboutmoney that explains due dates and statement dates, where to find statement dates, and how to budget around these two important things.
One of the best habits you can get into is understanding how these days work and setting reminders for yourself on a calendar, whether it’s physical or an app. This way you always pay on time!
Step 5. Keep your credit cards under 30% utilization until after your statement date.
Finally, tying in all of our previous steps to this one is how to utilize your credit card responsibly. Knowing and monitoring your credit, having bank accounts with positive balances, and paying your cards off on time all build the picture of a responsible borrower, which in turn builds your credit. Most financial experts recommend keeping your credit under 30% utilization in order to show healthy budgeting habits and prove you can keep your debt paid off. While some people say not to pay off the entire balance, most credit bureaus (the organizations that calculate your credit score) recommend paying 100% of it off each month. This is to avoid accruing interest on your credit card debt. Additionally, low utilization rates are another major factor in determining your credit score.
Now you know a little more about how to start building your credit
Credit is a complex and somewhat-opaque institution, so this is by no means a definitive or exhaustive guide. However, these 5 steps are great building blocks for good money and credit management. Consistently paying things off, budgeting your cards and cash, and establishing a fiscal history will all help build your credit in the long and short term.
Curious about some of these tools and other ways you can build your credit score? Check out the Esusu App, available on desktop and mobile.
Are you curious about tools to build your credit score?
The Esusu App empowers you with tools and marketplace offerings to effortlessly build your credit score, ensuring that your rent payments contribute positively to your financial journey.
