4 Ways to Start Building Credit
Credit scores give lenders a picture of how likely you are to repay a loan, based on your loan repayment history. A good credit score can make it easier to rent an apartment or get a mortgage loan; Your credit score can even affect the price you pay for insurance. So, how do you establish this when you’re just getting started?
First, it’s important to understand what good credit is based on. The two most important factors are payment history and credit utilization. Interestingly, how much money you have or make is never factored into your credit score.
Payment history: Making on-time payments is key to a good credit score. Payments 30 or more days late will be reported and will lower your score.
Credit utilization: This is the ratio of credit balances to total available credit. A good rule is to keep utilization below 30% — and even lower is better. For example, if you have a credit card with a $5,000 limit, keep your balance under $1,500. Even better, treat your credit like cash — if you only charge what you can afford to pay off each month, you will avoid paying interest on revolving balances and display responsible handling of credit.
Other factors go into your credit score, though to a lesser extent. The length of your credit history, variety of account types, and number of recent credit inquiries are all considered.
Here are four tips to get started on building a good credit score:
1. Get a secured loan.
A secured loan is a great option to start building your credit. You can usually qualify for a secured loan even with troubled or lacking credit.
With a secured loan, you make a deposit using your own money into a savings account or certificate of deposit. Next, you get a loan for the amount of your deposit, and the lender will put your deposit on hold to secure the loan and so you cannot withdraw the funds. As you make payments on the loan, the principal amount of your payment comes off hold and becomes available to you. With a secured loan, you are borrowing against your own money.
What is the benefit? Every month, the lender reports to the credit bureaus your on-time payments to build your credit history. Since 35% of your credit score is based on payment history, on-time payments are crucial, demonstrating you can handle a credit account responsibly.
You will likely need a source of income for this loan, as you must prove your ability to make the payments. Be sure to choose a manageable loan amount for your budget: Even a small loan builds credit.
2. Apply for a secured credit card.
This type of card is specifically for someone new to credit or working to rebuild their credit. A secured credit card requires a deposit — usually between $200 and $2,000 — which becomes your line of credit. You’ll need income to qualify for this type of card, but before applying, be sure the card company reports to at least one credit bureau.
Aside from the security deposit, this card works just as like a regular credit card. To establish good credit quickly, pay off your balance each month. Not only do you avoid paying interest fees on balances carried over, but you also establish good credit card habits early on.
As your credit grows, you can apply for a traditional credit card, but you will need to prove steady, full-time income.
3. Become an authorized user on someone else’s credit card.
This is probably one of the easiest ways to start building good credit. You do not have to prove creditworthiness to become an authorized user; the primary cardholder is responsible for making payments on the account, and you benefit from the age of the account you are added to.
Consider asking a parent or relative to add you as an authorized user on one of their revolving accounts. You’ll first want to be sure they have a good credit score and handle their finances responsibly. Second, be sure the credit card company reports authorized user activity to the three major credit bureaus.
4. Get a small car loan.
The best way to buy a car is with cash that you save over time. But you can also get a small car loan, which will be reported on your credit report. Even if you pay the car loan off early, the history of that loan being paid on time will boost your credit score. If you buy a reasonable car for your income, a large down payment and/or a co-borrower with established credit will help get you approved.
When you’re just starting out with building credit, expect it to take six months of payment history before a FICO score is generated. Be a good steward of your credit, and watch your score grow. Great credit scores can be leveraged into great deals — on loans, credit cards, insurance premiums, cell phone plans, and apartment leases. Your ultimate goal with money should be to pay cash for everything you buy, with your mortgage being your last debt. When you’re ready, Texell can help!
If you wish to comment on this article or have an idea for a topic we should cover, we want to hear from you! Email us at firstname.lastname@example.org.