The Dos and Don’ts of Building Credit for Future You

We've got Cleo's resident financial advisor, Anna, to answer some of your most-searched questions around building credit.

Anna Yen, CFA, is a financial wellness expert with 2 decades of experience in financial markets.  This includes on the trading floors of JPMorgan and as a Director at UBS. She specializes in personal finance, derivatives, and alternative investments including crypto.

Here's what you need to know.

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Credit – that is, debt – is a financial tool you can use to increase your buying power. “Building your credit” refers to something more specific: namely, your credit score.

In the modern economy, building your credit early is key. You need a good score to qualify for an apartment, get a mortgage, and buy a car.

Whether you want to build your credit for the first time or rebuild it after it sinks, keep these “do’s” and “don’ts” in mind.  

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How to build your credit: The Do’s

It takes time, effort, and often a little debt to build your credit. These “do’s” will put you on the right track.

Do…

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Learn how your credit score works

Credit is a valuable financial asset – unless it’s in shambles. Learning more about your credit empowers you to make smarter decisions and avoid costly mistakes. For starters, did you know that rent and phone payments aren’t always included in your credit score?

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Get your own credit

Many young adults and those with bad credit scores “piggyback” as authorized users on their parents’ credit cards to establish credit. While that can be a helpful first step, you should get your own credit as soon as possible. Not only will you avoid the negative consequences of someone else’s debts, but you’ll gain more financial control.

Not sure where to start? Cleo Builder can help.

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Your homework

But before taking out credit, do your homework. Examine each lender’s interest rates, fees, and terms and conditions. Shop lenders to find the best rates. Ask about introductory interest rates and what you’ll pay when they go away. Above all, read the fine print on every contract before signing.

Apply for a variety of credit types

Lenders like to see you can responsibly handle several kinds of debts. Mix it up with credit cards, car payments, personal loans – only when you need them, of course.  

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Keep your balances low

Generally speaking, higher credit card balances equal lower credit scores. Keeping your credit utilization low (using less credit than you have available) is a big, green flag for lenders. 30% is a great start; 10% is even better.

Note that creditors look at both your per-card and total credit utilization ratio. In many cases, taking out a credit card and not using it can actually build your credit.  

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Pay your bills on time every month

Missing even a single payment by more than 30 days can drop your credit score over 100 points. Though the damage fades over time, that’s a huge hit to recover from. Making your payments on time and in full is the best way to keep your credit score high. (And to rebuild it if you ever do make a mistake.)

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Make more than the minimum payment

Most credit card lenders set a low minimum payment – something like 5% of your total bill or $30 a month. While that’s affordable for most, it also ensures you’ll be making your credit payment much longer than you need to. (And paying more interest in the process.) Bigger payments make a bigger dent and can build your credit faster.

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Review your credit report annually

Everyone is entitled to receive their three credit reports for free once a year from annualcreditreport.com. Even if you think everything is smooth sailing, it’s important to check for and correct inaccuracies, such as out-of-date addresses.

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Build a solid credit history

Longer credit histories paint a more expansive picture of your creditworthiness, meaning that credit inquiries and small mistakes have less impact. Even if you don’t need to build your credit, putting a subscription service on a card and paying it off immediately can be the difference between a great credit score and no score at all.

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Get help if you fall behind

If you find yourself in danger of falling behind on your payments, don’t wait. Reach out to your creditors and ask if there’s anything you can do to protect your finances. (Loan extensions, deferred payments, etc.)

Likewise, if you find yourself deeply in debt, don’t stop paying on your cards. Instead, reach out to a nonprofit credit counseling agency to get back on track with a debt management plan.

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How to build your credit: The Don’ts

Naturally, there are several things you shouldn’t do when trying to build your credit. Here they are.

Don’t…

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Open too many accounts at once

Opening too many accounts too quickly has two main impacts:

• Each “hard” inquiry slightly drops your credit score
• Lenders see that you’re desperate for credit

Instead, space out your inquiries, limiting yourself to 1-2 per year.

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Take on credit you don’t need

If you don’t need to borrow money, it’s better to avoid debt. Often, saving up is the better option, especially if you’re already paying off a balance on another loan or credit card. Of course, there are exceptions – if you get a card at 0% interest for 18 months, for example, or if you pay off your balance each month.

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Take out cash advances

Many credit cards offer cash advances. They seem handy, but they’re really an excuse to charge you STUPID high interest rates. Don’t do it.

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Miss your due date

We mentioned this above, but it’s back: don’t miss your payments. Even though lenders don’t report missing payments until they’re 30 days late, it’s best not to tempt fate.

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Spend more than you can afford

Living beyond your means is the best way to get in over your head and fall behind. Don’t borrow loans you can’t repay, max out your credit cards, or carry a balance month-to-month. You need credit to build your credit, true – but don’t ruin your finances in the process.

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Close old accounts if you don’t have to

Closing a credit account means it will eventually fall off your credit report, reducing the number of data points in your credit mix. Ironically, this can actually lower your score.

If you don’t have to close an account, consider tossing on a single, regular monthly bill (like a Netflix subscription) and turning on autopay. That keeps your account active without running up more debt.

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Ignore warning signs of credit trouble

You might be overextending yourself if you can only afford your minimum balance or regularly make late payments. Take some time to re-orient yourself financially. Reduce your spending, pay down your debts, and move away from credit until you’ve gotten your spending back under control.

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Fall for credit repair schemes

There are literally thousands of fraudsters and “legitimate” companies who sell credit repair or monitoring services. In reality, you’re just paying someone else to do what you could do for free.

You can petition for inaccurate debts to be removed from your credit report or make on-time payments to build your credit yourself.

You can “freeze” your credit report with all three bureaus to prevent fraudsters from taking out debt in your name.

And if you want to monitor your report or score, many financial firms offer that as part of their regular services. (Like Cleo!)

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Above all, don’t give up

It’s normal for building and rebuilding credit to feel like it’s taking a while, particularly for new users or those who’ve filed for bankruptcy. While it’s frustrating, it’s also not the end of the world – with on-time payments and a solid credit mix, you’ll get there.

And if you’re impatient to get ahead, here’s how Cleo can help.

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Big love. Cleo 💙