How To Easily Establish Credit and Build it the Right Way
Whether you’re young, have a minimal credit history, or just recently came to the United States, you can build your credit score from scratch. Your credit history is not something you can erase at any point, so you want to build credit the right way and establish your credit from the get-go. Learning how to establish credit the right way sets you on a path toward building a good credit score.
Your credit score impacts your ability to purchase homes, rent properties, finance vehicles, consolidate debts, open new lines of credit, and more. Your credit score depends on factors like your payment history and credit utilization over time. Beginning with the right steps will help you build credit and establish a strong credit score. Below, we discuss the top tips to help you build an excellent credit score.
Start with a Secured Credit Card
If you don’t have any credit history, a secured credit card is an excellent place to start. Secured credit cards have cash deposit collaterals that determine your credit limit. For example, you may place $500 down as your upfront cash deposit, which means you will have a $500 maximum credit limit.
Your security deposit covers your borrowing amount, so you can only borrow within your credit limit of funds you actually have and can pay back.
Secured cards are easier to qualify for than traditional cards if you don’t have credit. Select a card that reports to all three major credit bureaus (Experian, Equifax, and TransUnion), so your payment data translates to your FICO® credit score.
You can use your credit card to purchase groceries, gas, or anything else. You will need to pay it off before the due date to begin building your credit history. After using a secured credit card to build credit for a bit of time, you can move on to a traditional credit card that doesn’t require a deposit.
Take Out a Credit-builder Loan
Credit-builder loans are small personal loans that help new borrowers establish credit.
In a traditional loan, you open the loan, receive the whole amount up front, then pay it off over time. With a credit-builder loan, however, you simply pay off the borrowed amount to prove your financial stability and develop your credit score. The lender will hold funds in an account that you will gain access to once you finish paying off the loan.
Essentially, a credit-builder loan forces you to save your own money while boosting your credit score by showing you are able to make loan payments on time. Most credit-builder loans range from around $500 to $2,000.
If you have trouble receiving a loan or a secured credit card, consider adding a cosigner to your application. Lenders will consider your cosigner’s credit score and income information on the application, strengthening your approval chances.
Consider Becoming an Authorized User
Credit card companies allow the primary account holder to add authorized users to the account. As an authorized user, you can use the card, and on-time payments will boost your credit score and the cardholders.
Becoming an authorized user on one of your family member’s credit cards can help you benefit from their credit if they have a long history of making payments on time and in full. After becoming an authorized user, the card’s history will transfer to your credit files, allowing you to develop a longer borrowing history much quicker.
You don’t have to use the credit card to assume its history on your credit score. Before becoming an authorized user, you should speak with the primary cardholder about a spending agreement.
Use Your Existing Bills to Build Credit History
When determining how to establish credit the right way, you need to think about how to take advantage of your current spending habits. You likely pay at least a few monthly bills, including rent, utilities, health insurance, car insurance, and cell phone bills. You can use this payment history to your advantage, even though you aren’t borrowing these funds and paying them back like you would for traditional lines of credit.
Many rent-reporting services, like LevelCredit and Rental Kharma, place your existing bills onto your credit report to help you generate a positive payment history. Some of these tools only improve your credit score in certain places, so be sure to check the fine print. For example, Experian Boost shows your utility and phone bills on your Experian credit report. Yet, it won’t affect your credit score with Equifax or TransUnion.
Understand the Factors Contributing to Your Credit Score
FICO® scores consider five main factors when determining your credit score:
- Your payment history
- Your amounts owed
- Your credit history
- Your new credit applications
- Your credit mix
You need to practice good credit habits to maintain optimal ranges within each of these categories. While you cannot immediately fix a low credit score due to your short credit history, you can boost your credit score in the other categories. We recommend the following tips:
- Make all credit payments on time and in full. Your payment history is the most important factor in building your credit.
- Keep your credit utilization ratio low. Use less than 30% of your allowed credit maximum. For example, if you can borrow $10,000 on one card, don’t exceed $3,000.
- Keep applications to a minimum. Each time you apply for credit, it can harm your credit score. Only apply for necessary lines of credit, and try not to use too many lines at one time.
- Keep your accounts open and active. To increase your average account age, you want to keep all accounts open with consistent small transactions.
Monitor Your Credit Score Over Time
Your credit score updates once a month based on your financial actions. You shouldn’t expect to see huge increases immediately since building credit takes time. You can monitor your credit score by checking it through your banking institution or with a free credit report tool to ensure you’re moving in the right direction.
If you have more questions about how to establish credit the right way, contact Boost Your Score at 1-800-259-1270 to speak with our team.
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