Building credit might seem intimidating at first, but it’ll go like clockwork once you know what you’re doing. So, what’s the best way to build credit anyway?
It looks like you’ve landed on the right post! Higher credit ratings are a little more challenging to achieve, but I’ll show you how to get it done.
In the United States, credit is a cornerstone of everyone’s financial life. Building your credit history will be your first step if you’re right at square one. This entails opening or being added to an account, typically a loan or credit card.
This account should be reported to at least one of the three major consumer credit agencies in the United States: Equifax, Experian, and TransUnion.
The problem is that many organizations want to verify your credit before agreeing to lend you money or offer you a credit card. Of course, they may be cautious if you don’t have one.
Fortunately, there are a few options for avoiding this potential stumbling block. Continue reading to learn about some steps you may take to start rebuilding your credit from the ground up.
The Best Ways To Build Credit
Let’s get started. Below are tried and true ways to get your credit score up. That is if you stay smart about using it.
Obtain A Credit Card
A credit card would be your first natural step when you’re just getting started with your credit journey.
Yes, there are all sorts of credit cards, so hunt for ones that don’t charge an annual fee. Also, be on the lookout for ones that don’t force you to pay interest or require constant debt to earn credit.
Here are a few fantastic credit card options to consider for your first credit card.
Student Credit Card
Many major credit card companies provide student credit cards to qualifying college students. They include a bunch with rewards programs and no annual fees. Student credit cards operate similarly to other unsecured credit cards in that no security deposit is required.
Unless you can establish you have a stable income, you may require a co-signer, especially if you’re under 21. One other option is to have a parent or trustworthy friend add you to their account as an authorized user.
Secured Credit Card
Secured credit cards are designed primarily for folks who are new to credit or who are restoring their credit. To apply for a secured card, you must provide a refundable security deposit to the issuer.
If you don’t have any outstanding dues at the time you close your account, you’ll get your deposit back. Annual fees may also be nonexistent or forgiving on the best secured credit cards. Plus, your account will be reported to all three credit bureaus.
Cash-flow Credit Card
Several businesses are adopting a novel technique to identify who is eligible for credit cards. They do check your credit history if you have one. If you’re new to credit, they might look at a qualifying bank account instead, which could improve your chances of approval.
The cards are frequently referred to as “cash-flow-underwritten” credit cards because they are approved based on your personal cash flow. This means they’ll check the money going in and out of your account. It will help if you’re a whiz at managing your finances.
Retail Credit Card
Retail credit cards, like those issued by department stores, may have fewer approval requirements than other types of credit cards. However, these cards usually come with high-interest rates and low credit limits. You may only be able to use the card at the store with which it is affiliated.
Someone Else’s Credit Card
Sometimes, getting a credit card proves to be complicated. If this is the case for you, it may be time to ask a family member with good credit for help. They could allow you to add you as an authorized user of their credit card.
You can get a credit card in your name linked to the account as an authorized user. The credit card business may begin submitting account information to credit bureaus under your name, putting you in their databases.
Because company regulations differ, double-check with the issuer and see if approved users are reported to the credit bureaus. If it doesn’t, you won’t be able to build credit as an authorized user.
While becoming an authorized user can benefit you, it also puts your credit health in the hands of someone else. Your credit may help if the primary cardholder pays their bills on time and keeps their credit card balance low.
However, if they pay a payment late, it may be recorded to the credit bureaus under your name. This could harm your own credit score.
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Take Out A Loan
If you’re thinking about pursuing higher education or making big purchases, it looks like a loan is in your future. One method to start building credit is to take out a loan from a lender that reports to the credit agencies.
In general, borrowing money and paying interest merely to build credit is not a good idea. However, if you want to avoid credit cards, taking out a loan could be a wise long-term decision.
Here are a couple of the types of loans you can take out:
Banks, credit unions, and online lenders may provide credit-builder loans for folks who prefer to build their credit.
The lender will keep the cash that secures the loan, similar to a secured credit card. For example, your loan is put in a savings account instead of getting funds until the loan is paid off.
To assist you in developing credit, the lender will report your account status and monthly payments. Once you’ve paid all of your costs, the funds will be sent to you.
Keep in mind that credit-building loans may come with an application fee and may be subject to interest. However, your security deposit could earn interest, which could help relieve some of the expenditures.
There’s a strong possibility you’ve already started developing credit if you’re taking out (or have previously taken out) student loans. Most federal student loans don’t require a credit check, so it’s possible to get accepted even if you have bad credit. However, your debts will be reported to credit bureaus, which can help your credit history.
Spruce Up Your Credit Profile
Alternative data pertains to information that isn’t often found on credit reports, such as your payment history for rent, utilities, and cellphones.
Additional accounts (like on-time payments) can assist you in improving credit when you’re just starting out and have a sparse file. The credit agencies may be able to add this information to your credit reports if you can get it to them.
Experian Boost and eCredable, for example, allow you to link qualified bank or utility accounts. The programs check for payments or charges that qualify for reporting to a bureau.
Experian Boost can currently add data to your Experian credit report, whilst eCredable sends data to TransUnion.
You can also use services like LevelCredit to add information about your rent payments to your credit reports. Like other alternative data, Rent reporting programs may only send your information to one or two bureaus.
Use Your Overseas Credit History
Yes, your credit history won’t count in credit agency systems in the US if you established it in another country. However, the credit you acquired in another country may not be completely wasted.
Existing clients can receive a credit card in the United States through programs run by international banks and card issuers. They can then report the US credit card to the credit bureaus to assist you in establishing credit in the United States.
Some companies have taken a different strategy. Nova Credit, for example, lets you apply for financial products in the US using your credit history from certain countries.
Jasper, a credit card company that provides a card for professionals who have a job offer and are relocating to the United States. If this is your situation, you can apply for the card and be approved for it before you get to the States.
Tips On Improving Your Credit Score
At some point, you’ll have a credit card or loan to tackle. So, what actions do you now take to build credit? Here are some tried-and-tested strategies.
Pay your bills on time.
If you pay late, no plan for improving your credit will work. Why? Late payments can spoil your credit reports for 7.5 years. Keep in mind that payment history is the single most crucial element that determines credit ratings.
If you fail to make payments for more than 30 days, contact the creditor right away. If you can, make arrangements to pay up and ask if the creditor will consider not reporting your unpaid dues to the credit bureaus.
Even if the creditor refuses, it’s worth getting the account current as soon as possible. Each month that an account is recorded as late lowers your credit score. Fortunately, the consequences of missing a payment decrease with time.
After a blunder, demonstrating a slew of positive credit practices can help you quickly repair the damage and enhance your credit.
If you’re unable to pay all of your expenses on time, learn how to prioritize them. Investigate the financial aid you have available to you if you have to.
Make payments as frequently as you can.
Try to make small payments throughout the month, known as micropayments. You can keep your credit card balances low and enhance your credit. Making several payments throughout the month affects a credit score aspect known as credit utilization. This is another aspect that has a significant impact on your credit score after payment history.
If you can maintain your utilization low rather than allowing it to rise as you approach a payment due date, it will immediately help your credit score.
Take the time to dispute report errors.
Your credit score could be lowered as a result of a mistake on one of your credit reports. Fixing it can help you boost your credit score rapidly.
Equifax, Experian, and TransUnion, the three major credit agencies, are currently required to provide you with a free report every week. Request such reports at AnnualCreditReport.com, and then double-check them for errors.
Look out for late payments when you paid on time or erroneous information that should be off your record.
Once you’ve found these errors, file a dispute to have them deleted. Credit reporting agencies have 30 days to inspect and respond. Some organizations claim to contest mistakes and enhance your credit rapidly but still proceed with caution.
Request for a higher credit limit.
When your credit limit is increased, but your debt remains the same, your overall credit utilization is reduced. This could help you improve your credit. Reach out to your credit card company and ask if you can acquire a greater limit without a “hard” credit inquiry.
You have a better chance of obtaining a bigger limit if your salary has increased recently. Being vigilant about managing your debt also looks good on your record.
Keep your credit cards open.
If you’re trying to improve your credit score, note that canceling credit cards can make things trickier. When you close a credit card, the credit limit on that card is removed from your overall credit utilization calculation. Keep the card open and use it semi-regularly to avoid the issuer closing it.
Related Reading: Why is Personal Finance Important For You?
While credit has numerous complexities, you don’t need to be a credit expert to create outstanding credit. You can get there by opening accounts with creditors that report to the major consumer credit bureaus.
Then make sure you pay your dues on time and reduce your credit card usage. It’s all just a matter of putting in the time and staying committed.
Credit standing is something that has to be earned. Even if you start off riding the coattails of someone with good credit, you’ll have to learn how to stand on your own. Good luck!