Your credit is important for everything from getting a loan to purchasing insurance. But it takes time to earn a high credit score. If you are new to the world of credit or are working on repairing your credit, it is best to start building credit as soon as possible.
How to Build Credit
To establish a credit history that is attractive to lenders and others, you need to borrow money and make all your payments on time. It’s very simple, but it’s not necessarily easy. You can definitely see improvements in a short period, but significant changes take a long time.
The following strategies will help you gain short-term momentum and establish a strong credit history that will serve you throughout your life. You don’t have to pursue these methods in order, but the easier methods are listed first, especially if you are on your own (without your parents or others helping you). Depending on your needs and resources, some of these options may not fit well.
Regardless of the method you use, it is essential that your lender reports your activity to the three major credit bureaus. If they don’t, your credit won’t improve. Ask your lender if they report to the credit bureaus before borrowing, and then check your credit reports at least 30 days later.
Cash-Secured Loans
One of the easiest loans to qualify for is the loan that you have already paid off. With a cash-secured loan, you borrow against the money you have in a savings account or a certificate of deposit (CD) at your bank or credit union. Lenders take on some risk with these loans – they can take the cash if you fail to pay – so it’s easier to get approved. For example, you can deposit $500 into your bank and get a $500 loan. You’ll make small monthly payments on the loan, and over time, your credit will improve.
These loans are known by various names, including credit builder loans.
Secured Credit Cards
As an alternative to cash-secured loans, a secured credit card also allows you to borrow against the money you deposit with the lender. The difference is that you get a plastic payment card that you can use to make purchases at stores or online. You can also keep your loan balance at zero (having no balance on the card doesn’t improve your credit faster), which helps reduce interest costs. It’s important to note that a secured credit card is not the same as a prepaid debit card.
Co-signer Assistance
A co-signer is someone who completes your loan application with you and helps you get approved – by agreeing to pay your loan if you don’t. The co-signer must have good credit and sufficient income to qualify for the loan. Essentially, the co-signer is the reason your loan gets approved (even though the loan proceeds go to you). If someone is willing to do this for you, this loan can help you establish credit as long as you make all your payments on time. Co-signing a loan is a huge service, and it’s risky. If you fail to pay, the co-signer is 100 percent responsible for repaying the loan, even though you receive the money.
Authorized User
If someone already has an open credit account, they can add you as an authorized user. You’ll receive a card with your name printed on it, and you can use the card to make purchases. However, you are not responsible for repaying the loan. It is important to note that this only works if the card issuer reports authorized users to the credit bureaus.
Programs
Retail Financing
Instead of borrowing directly from banks or credit unions, you can borrow through retail programs that finance loans using finance companies or banks. You may have seen offers to buy goods on a monthly payment plan or “the same liquidity,” and these programs can help you build credit. The same goes for cards issued by stores and gas stations. It may be easier to qualify for these cards than standard credit cards, but you need to make sure that the loan activity is reported to credit bureaus.
If you choose this route, make sure to pay off your balances quickly. Don’t fall into the trap of minimum payments, or you’ll end up paying much more for everything you buy.
Personal Loans
You can also apply for “signature” or personal loans at your bank, through a credit union, or through an online lender. Using an unsecured loan helps you move away from credit cards and store loans. Instead of paying at the time of purchase, you’ll make a regular monthly payment (which credit recording programs like). With an unsecured loan, you don’t put anything up as collateral, so the lender takes on more risk and charges higher interest rates.
Keys to Building Credit
Check your credit: Start by making sure that your credit reports are free from any errors that could hinder your credit scores. Especially when you have poor credit or are recovering from a difficult past, mistakes can prevent you from getting the scores you deserve. Credit bureaus should provide at least one free credit report annually, and you should take advantage of this right.
Always pay on time: One of the most important elements of your credit score is your payment history. If you pay on time, your credit scores will improve. Late payments will affect the progress you make, so it’s best to avoid borrowing altogether unless you are confident in your ability to repay.
Set yourself up for success: Get your finances in order to ensure you can make your payments and complete them on time. Open checking and savings accounts, if you haven’t already, and set up online bill pay. Understand your income and expenses, and build a budget to keep yourself on track. Regularly balance your bank account to avoid any unpleasant surprises.
Borrow moderately: There are several reasons to borrow less than what the lender allows. Using credit assesses how much you’re currently borrowing compared to how much you’re allowed to borrow (the credit limit, for example). It’s best to use only a small percentage of your available credit—around 30 percent or less. If you consistently max out your credit accounts, it may seem like you’re experiencing financial hardship, and your credit scores could drop. Even if you pay off your credit card each month, increasing the balance can be a problem. Borrowing costs: You pay interest and other fees when borrowing, so you effectively pay more when buying things on credit. In some cases, you may end up paying more in interest than the purchase price of the item. Borrowing can make sense when it brings a long-term improvement to your life or finances, but borrowing for “wants” is risky.
Diversify Your Loans
As you build credit, use different types of loans. Your credit recording models reward you for having a variety of loans for different purposes, including revolving credit (credit cards), auto loans, and
Source: https://www.thebalancemoney.com/establish-solid-credit-history-315530
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