Your credit history is a significant consideration when applying for loans and credit cards. If you have a low credit score, banks and lenders will be less willing to approve your loan or credit card application. If they even accept it, you will be offered a higher interest rate since you are a high-risk applicant.
Hence, once you enter the workforce, it is a sound financial practice to start building your credit score right away. As you tread the stage of adulthood, you will be building your credit score even unknowingly as your banks, insurance firms, cooperatives, and telco companies compile your data for credit scoring to the Credit Information Corporation (CIC).
When you apply for a loan or (higher max limit) credit card in the future, your bank or lender can access your credit report from the CIC. If you have a good record, you have better chances of getting approved and with lower interest rates, among other benefits.
How can I start building my credit score?
1. Apply for a starter credit card
A starter credit card might have lower limits, but having one can be extremely helpful for building your credit score. When you secure a stable source of income, which is ideally through a full-time job, stay with your employer for at least a year so you can have better chances of getting approved for a credit card. You might also want to prepare other proof of stable income, such as bank statements, landline phone, and proof of residence.
Alternatively, you can apply for a secured credit card, which is just like a regular credit card except that you provide monetary collateral (which will also serve as the basis for your credit limit). For example, if the minimum amount of deposit for the secured credit card is Php25,000, your credit limit will be a percentage of that amount. Although you are technically borrowing your own money, using this type of card helps build your credit history.
2. Use your card responsibly
Having a credit card in your 20s is like being given 100 pesos to spend in an arcade when you were a child. You’re immediately thinking of things that you can buy, keeping an eye out for sales, and constantly having an inner battle with yourself whether to swipe your card or not.
But if you want to build a good credit score, use your credit card responsibly. Stay well below your current limit and pay your bills on time. Practice delayed gratification. More importantly, stick to your budget so that you won’t have to swipe your card when your cash runs out.
3. Keep your debt-to-credit ratio low
It is recommended to keep your debt-to-credit ratio below 30% to help boost your credit score. For example, if your credit limit is 50,000, keep your balance at or below Php45,000. Moreover, if you are applying for loans, ensure that you can pay them off while paying your credit card as well.
Having good credit can put you in a better financial position in the future. Hence, now that you are still young, start building your credit history by learning how to manage your finances, handling debt responsibly, and practicing smart financial decisions. Your future self will thank you for it.