Build Good Credit With Your First Credit Card

Dear Opening Credits,

I am a student who has just graduated from college. I recently opened a credit card and have a $500 credit limit. It is the only credit card that I have, and I put all of my purchases on it, which causes me to carry a high balance. However, I pay off the balance in full every month. Could this be hurting my credit score? Would it be smart for me to get another card? 

- Joseph

Dear Joseph,

You've already cleared one hurdle, and that's getting your own credit card. The issuing bank gave you a low but reasonable charging limit for it, too. This is normal, not only because you might not have a high income at the moment, but because there is a learning curve with plastic. Many new users get in over their heads quickly. I was no exception. My first card was a retail account, and I immediately splurged on a lovely coat that was out of my financial means. It was tatty and unwearable by the time I paid it off.

It appears that you are already doing better than I did, however. Charging regularly and repaying the balance in its entirety is the right thing to do. Rather than hurt your FICO score, you're helping it! And yes, getting and using another type of credit account would also be beneficial, but I would wait a while so you can build your financial and credit reputation. To understand why, pretend that you're a bank, and that a stranger comes to you for a loan. What qualities would want him to possess before lending him money? You'd probably want him to:

  • Have enough income. You wouldn't hand over cash to someone without checking to see if he has the means to repay, would you? Of course not. You'd make sure he has a job and that his earnings are commiserate with the loan amount. For example, if he's making $1,000 a month, lending him $300 can seem reasonable -- but $3,000 might not.
  • Have a long track record of being responsible. It would be difficult to trust a person who has no history of using credit well. So you'd do some sleuthing. If you found that he's borrowed from many people over the years and has always made good on the debts, you'd have some assurance that he would behave the same with you.
  • Show he can handle all sorts of obligations. Another vote of confidence would come from him showing you that he has and had many types of credit products. If he has handled them all well so far, it vouches for his overall borrowing and repaying prowess.
  • Not hitting up others for money. Even if you see that the guy has done all the right things in the past, his present and future can be radically different. If he is asking many other people for a loan at the same time, it could indicate desperation. Is he in trouble? On drugs? About to lose his job? You don't know, but it sure could be a warning sign.
  • In short, banks are no different from you, as an individual, when it comes to deciding whether or not to take a risk and extend someone credit

Therefore, if you want another credit card (perhaps one with a higher spending limit and a rewards program) or a low interest rate loan, just prove that you're good for the payments, and take the time to create a long and great pattern of charging and borrowing. Then, when you're ready, research the best account for you and apply for that one.