It can be difficult to know where to begin when you first start building credit. However, everyone has to start somewhere, and it's important to begin at the right place. Once you choose your starting point, it's vital to handle your credit responsibly so that you build up a healthy credit score to qualify for prime interest rates and offers in the future.
Secured Credit Cards
Secured credit cards are a good way to build credit for those who do not qualify for traditional, unsecured cards. To obtain a secured card, you need to deposit money into an account, which acts as the "security" for your credit card. In the event that you do not make payments on the credit card, the lending institution may take the funds in the account. For example, if you deposit $500 into the account, your card limit will be $500. If you carry a balance and fail to make payments, the lender may access your deposit to make up for the missed payments. Make sure that the lender reports the secured card to the credit bureaus; otherwise it won't be effective in building credit.
Unsecured Credit Cards
Some lending institutions offer unsecured credit cards with low limits for those who need to establish credit. Look into the fees and interest rates associated with any card for which you may qualify. It may make more sense to establish credit with a secured card that transitions into an unsecured card after a period of time to avoid high fees and interest rates. If you do take on an unsecured card, make sure to pay off your balance each month to avoid paying a lot of extra money on your debt. MSN Money writer Liz Pulliam Weston recommends charging no more than 30 percent of the credit limit on your card, even if you pay it off quickly. You never know when the creditors report to the bureaus, so it's not wise to spend to the limit, even if you pay off the full balance at the end of the month.
Store or Gas Cards
When first building your credit, you may more easily qualify for store or gas credit cards than traditional unsecured credit cards. Generally, these cards are easier to obtain than bank-issued cards and even after you've built up your credit and have a traditional card, they add to your credit mix. Both Fair Isaac Corp. and VantageScore look for a healthy credit mix, which may include installment loans, bank-issued cards and store or gas cards. Again, it's vital to check whether or not the creditor reports to the credit bureaus; otherwise, your efforts may be in vain.
Considerations
It's very important to pay your credit cards on time, and to keep your balances to 30 percent or less. Timeliness of payments and credit utilization are the two largest factors in the calculation of your credit score, at 35 and 30 percent, respectively. One way to ensure that your cards are paid on time is to set up automatic payments. To ensure that you keep your balances low, pay off any purchases immediately.
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