Credit is kind of a tricky subject. If you want to buy a house or take out a loan, you need to have a good credit score. But you cannot have a good credit score if you have no credit history. And to build credit you need to be approved for a credit card or loan that requires a good credit history. Confusing right?
You may feel discouraged to begin your credit journey with no credit history, but there are a few ways you can begin building your credit from the ground up.
Authorized User
This first way requires no work on your part. All you need is a trusted individual who can place you as an authorized user on their credit account. You would receive a credit card you do not even have to use that would be connected to their account. As they are making their payments, you are building your credit. However, if they make late or missed payments, your credit score will suffer as well.
Credit Cards
If you do not have the option of becoming an authorized user, you can always open your own credit card. There are a few credit card options that are more lenient in terms of accepting beginners. The most common is a secured credit card. This card requires a safety deposit that you would pay to get the card. You will receive the deposit back once you close the account unless you still owe them money. Student and store credit cards are also good options that do not have strict approval policies. Each card has different requirements, but you should look for one that does not charge an annual fee, make you pay interest, or requires you to have a balance to build credit.
Loans
Taking out loans strictly for building credit is not advised. However, if you are already taking out a student loan or another large loan, you should use those to your advantage. Student loans, as long as they are in good standing, are already building up your credit. If you are not a student, you can always take out a credit-builder loan. For this type of loan, you would apply, and the loan amount would go into a savings account that you do not have access to. Once you have paid off the loan amount, you will then receive the funds. As you are paying off the loan, the lender is reporting that to the credit bureaus. Just remember that although your score goes up with made payments, it will go down with just one missed payment.
Now that you have developed some type of credit, you want to work towards getting that excellent rating. There are a few ways you can do this.
- Make your payments on time. Payment history is the number one thing that affects credit scores. Set up alerts so that you can pay in full, or at least make a minimum payment on time.
- Watch your card usage. Although you have a credit card, it does not look good on you to spend it all. It is recommended that you only use about 30% of your credit limit.
- Have a variety of accounts. Opening different credit cards and loans help your credit score a good amount. It shows that you can manage and maintain multiple accounts.
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