Establishing good credit is simple, if you follow a series of consistent steps and smart spending habits over time. Your FICO score is what financial institutions use to determine whether or not you’re approved for certain loans or other debt. Here’s exactly how your FICO score is calculated and the effects each one has on your credit score.
When establishing a good history of credit, you want to strive for consistent, smart spending habits each and every month. Things like:
Using 30% or less of your credit card balances
Having a good mix of types of credit
A long-standing history of not missing payments
Not opening too many new accounts at once
Paying off your debt balances
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All of these steps are equally important and will help you improve your credit over time. However, there’s one simple way you can “hack” good credit and that’s by putting it on autopilot.
Start by applying for a new credit card with a low limit. Make sure the credit card doesn’t come with annual fee, since the goal is to be smart with your money, not to start out already in debt. Don’t worry about applying for a card with lots of rewards or cashback, just stick to a basic credit card with $0 annual fee. If you don’t qualify for a traditional credit card, because you have no history of credit, or a poor one, then apply for a secured card instead.
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Once you’re approved for a new credit card, choose one recurring bill to charge to this new account. Something like paying your electricity bill, cell phone payment or other recurring charge, like your Netflix subscription, is a good choice. You don’t want to choose a bill that’s too high, but instead a low, regular payment that occurs every month and can be easily paid off. Just log into that bill’s account online and update the payment information to be your new credit card.
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Next, use your computer so you can access the online account with the credit card provider’s website. Input your banking information so your new credit card can be paid via your checking account. Go to the payments section and enroll in automatic payments, so your recurring bill will post to the credit card account and automatically be paid every month from your bank account.
This is a simple but important step as you don’t want to forget to pay your monthly credit card bill. The point is to make this process run without you so you can start establishing a good history of responsible credit usage.
Finally, to avoid temptation to use your new credit card limit (which is why you should choose one with a low credit limit to begin with), cut up your card. Or if you prefer, you can simply store it away in a place that you won’t be tempted to swipe it. Don’t keep it in your wallet and think you won’t use it, because it’s all too easy to use it for needless spending. Put it in a safe place, or simply cut it up altogether. It will still continue to serve it’s purpose of building good credit on autopilot.
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Building good credit takes time and this process of putting it on autopilot will help you charge a payment and consistently pay it off every month without thinking. You’ll never miss a payment and be able to prove that you can handle credit cards responsibly.