I have written this guide as a balanced approach to building credit if you are starting out. It is not intended to give you the maximum credit score, since that would require that you know perfectly how to manage credit from the beginning, an unrealistic expectation. If you follow this guide, at the end of the first year you should have a solid credit history that would allow you to get approved for most credit cards and obtain reasonable interest rates on auto loans.
Day 1: get a secured credit card. I recommend the Bank of America cash rewards secured credit card, for reasons mentioned here. Get the highest credit limit you can afford, the higher the better.
For the next 3 months, learn how to manage credit. Figure out the statement balance date and the due date. Link your credit card to an online account and set up automatic payment so that you will never miss a payment; remember to select the option to pay the full statement balance to avoid paying interests. Also go to your online banking account, and set up your credit card as a payee to gain better control over payments.
Pay your credit card balance a few days before the statement closes to minimize the reported balance. If you wish to pay more than the current balance, you’ll need to go to your online banking account; otherwise, you can pay from either your credit card online account or your online banking account. Switch all your purchases from your debit card to this credit card.
Month 4: get a second secured credit card. By this point you should be rather familiar with how to manage a credit card. But two credit cards will seriously accelerate the credit building process. I recommend the Capital One secured credit card. Since the deposit requirement for this card is much lower than the credit limit, I strongly recommend that you get the highest credit limit of $3,000 which would require a $200 deposit. Repeat the process you had for the first credit card. If you indeed got a BofA card and a Capital One card, you should run most of your purchases through the BofA card since BofA will likely give you a high credit limit when the card graduates. Capital One secured credit cards on the other hand rarely ever graduate.
Learn the habit of letting only one credit card report a non-zero balance: pay off the balance on the Cap One card a few days before the statement closing date and don’t buy anything with it until then. For the BofA card, if the balance seems too high relative to the credit limit a few days before the statement closing date, pay it down, but not all the way down. If all of your credit cards report zero balances, your credit score will be penalized.
Month 7: get your first non-secured credit card. Since you’ve had the BofA card for 6 months, your best shot will be to apply for a non-secured BofA credit card such as the BofA Travel Rewards credit card. Otherwise, apply for a store credit card backed by GE such as a Walmart Mastercard. Repeat the process you used for the previous 2 cards: online account, automatic payment, etc. Make sure you only let one card report a non-zero balance. If you got a GE card, you should run some purchases through it so you can ask for a higher credit limit later.
Month 10: get your first American Express-issued card. Getting in with Amex is very important, for reasons I mentioned here:
You want an Amex card with no annual fee that you can keep forever. I recommend the Amex Blue card.
Again, repeat the process you used for the first 3 credit cards, and let only one of your cards report a non-zero balance.
At this point, you already have 4 credit cards, the number of cards that most people would ever need. However, since 2 out of the 4 cards are secured credit cards that charge annual fees, there is room for improvement.
Month 12: get rid of the secured cards and their annual fees.
At this point, assuming that you have had perfect payment history with the BofA secured card, it should have graduated into a non-secured credit card, giving you back the deposit. All you need to do is call BofA to request that they remove the annual fee.
The Capital One card, on the other hand, probably did not graduate and never will. This is the time to cut the string, close the card and get the deposit back.
In addition, at this point you need a decent credit limit. If you got a BofA card in month 7, that card should have a pretty high limit. If you got a GE card, it probably did not start with a high limit; you want to request a credit limit increase at this point. Also request a credit limit increase on your Amex card.
At the end of the first year, you now have 3 open credit cards with no annual fees, 1 closed credit card, and a FICO credit score in the low 700’s. At least one of your open cards has $3,000 or more in credit limit. Your credit history is better than most with 1 year of experience.
This guide was built based on my personal experience and the knowledge I have gathered in 2 years of research. I did not follow the exact same steps, but my path was very similar. Now that my credit history is almost 3 years old and my FICO credit score nearing 800, I have the solid foundation I built in my first year to thank. Be patient and disciplined, and you’ll get there too.
Let me know if you have any questions or comments.