How to Start Building Your Credit

Your first credit card can be the start to building your financial future. Just remember, how you use it can affect you for years down the road.

For example, build a good credit score and you could see lower interest rates on home and auto loans, and receive better credit card perks. Make too many mistakes with a first card, however, and you could have less financial flexibility. Landlords, lenders and utility companies could view a low credit score as a risky customer for them and deny you services, or at least charge you more for them.

Start by only using your new credit card for emergencies. Don’t use it for everyday purchases. Set up an emergency fund with auto-transfer capabilities to pay for any unexpected costs—such as a broken car, hospital stay or other emergency—and then pay the credit card bill in full when they happen.

Once you’ve set up an emergency fund and have a household budget to follow, start to add some recurring charges to your credit card. These can be a cellphone bill, utility bill, Netflix or other monthly payment.

If you can handle those bills without a problem—meaning you can pay them in full and on time each month—then it’s time to start making everyday purchases on your credit card if they fit in your budget.

Paying your credit card bill in full each month (and on time), will mean you won’t pay interest charges or late fees. Those two steps are the best things you can do to raise your credit score. If you can’t pay your bill in full each month, at least make the minimum payment and don’t charge anything more until you’ve paid off the balance.

Having a credit card balance is okay, as far as a credit scores go, as long as it’s less than 30 percent of your total credit card limit. A higher debt-to-credit ratio and creditors could see you as a risk because you may be spending more than you can afford.

From time to time you may get blank checks from your credit card company. Don’t use them. They’re cash advances on your credit and carry higher interest rates than regular charges do.

After getting your first credit card, you’ll likely get more credit card offers in the mail from other credit issuers. They may offer all types of rewards and better rates than your current card. Don’t go for them until you’ve established a good credit report for at least a year. Having too many credit cards can only complicate your finances and make it easier to overspend.

Lastly, read your credit card statement carefully each month. Look for fraudulent charges and other errors, and report them to your credit card company immediately. And get in the habit of checking your credit report for free at least once a year from the three main credit reporting agencies to check for errors on your report.