How to Build Your Credit Score from 0 to 700 in 6 Months
Love it or hate it, your credit score has an impact on your finances. If you have a low credit score, you’ll pay higher interest rates and more for your auto insurance. In fact, according to BankRate, the current difference between a 580 and 700 credit score is 1.581%. That increases the total cost of a $150,000 30-year mortgage by $102,367.
In order to build your credit score, you must borrow money. But in order to borrow money, you have to have some credit. Seems like a catch 22, right?
While they certainly have a laundry list of negatives, nothing can help you build credit more quickly and easily than a responsibly used credit card. Here’s how I used a credit card to build my credit score from 0 to 700+ in 6 months:
1. Apply for an Easy Credit Card
My first credit card was a student card. These are designed specifically for students with limited credit history. Keep in mind that each time you apply for a card or loan, your credit takes a hit. Refrain from applying for multiple accounts until you’ve established at least a year’s worth of credit.
2. Set up Automatic Payments
35% of your score is determined by payment history. If you are late on a couple payments (especially early on), your score will drop significantly. The best way to make sure your credit card bill is paid each month is to set up automatic payments through the credit card website. You can set your account up to automatically pay your monthly bill directly from your bank account.
As a word to the wise (from someone who’s made the mistake): Be sure to make sure you have enough in your bank account to pay off the bill. This will keep you from missing a payment and incurring unnecessary overdraft fees.
3. Buy ONLY What You Can Pay Back
Never buy more than you’ll be able to pay off each month. If you don’t have much in your bank account, just buy something small each month (Netflix subscription, tank of gas, or pack of gum). The last thing you want to do is sink into credit card debt, which will cost you 15%+ in interest and tank your credit score.
4. Use as Little Credit as Possible
FICO considers you more of a credit risk if you use up a more significant portion of your line of credit. For example, if your credit limit is $1,000 you should try to keep your balance below $200-300 per month. If you make a habit of getting close to your credit limit, your FICO score will take a hit.
5. Don't Fall in Love with Your Card
Credit cards have a lot of great benefits like cash back bonuses, reward points, and building credit. On the flip side, they decrease the pain of purchasing (which leads to higher spending) and can trap you into high-interest debt. They are a slippery slope that destroy a lot of financial lives (especially young ones). Be smart.
A Good Starter Credit Card
Student credit cards are great tools for college students and recent graduates. They are built specifically for young people with limited credit history. The Discover Open Road Card for Students (not an affiliate link) gives you 1% cash back on everyday expenses and doubles to 2% for Gas and Restaurants. There is no annual fee.
If you follow this outline, you should be able to get your score at or very close to 740, which will get you the best interest rates and keep your auto insurance as low as possible.
It's your turn! How have you built credit? Has an increasing credit score helped you save money? Leave comments below!
Nathan is the author of multiple books and also blogs about early financial freedom through dividend investing at Dividend Growth Machine.