In today’s world, your credit score follows you around like a shadow. And because your score is used for everything from buying homes and cars to setting insurance rates, securing loans, and obtaining credit cards, keeping that number high is vitally important. But what if you’re just starting out? What if you have no credit history to use to obtain the things a credit score is both based on and used for? It’s a brain twister—How do you build credit if it takes credit to get credit to begin with? Well, it doesn’t have to be as complicated as it sounds. There are several safe and smart ways to begin building a credit history. And with responsible practices and prudent spending, you’ll soon discover the benefits a good, solid credit score can provide.
Secured credit cards
A good way to dip your toes into the waters of credit-building is by obtaining a secured credit card. Secured cards are backed by a cash deposit that you make upfront and get back when you close the account fully paid. Just like any other credit card, you use a secured card to make purchases (usually limited to the amount of your deposit) and you incur interest charges if you don’t pay your balance in full every month. These cards are meant as short-term solutions, so once you build credit you can move up to an unsecured card. Choose the right secured card for you here, and be sure the card you choose reports to all three credit bureaus (Equifax, Experian, and TransUnion) so you get the credit you deserve.
Credit-builder or secured loans
The name says it all. — Credit-builder loans are loans designed to help you build credit. They usually work like a forced savings program. The lender (usually a credit union or community bank) holds the money you borrow in an account and releases it to you once the loan is repaid. But if you have money in a credit union, you may be able to build credit through a secured loan, which usually has more favorable rates than other loan methods. Your interest rate on a secured loan will typically be a little higher than the interest you earn on your savings account, but the positive credit reports are probably worth the price.
You and your co-signer
Using a co-signer is another good way to get a loan or an unsecured credit card. But since it requires quite a bit of trust, a cosigner is usually someone close to you, a parent for example, who fully understands the implications and risks. Mom and or dad will still love you no matter what, creditors probably not so much.
Pay bills, get credit
Another way to build your credit is to make sure you get credit for the bills you pay. That is to say, you might want to check out rent-reporting services like Rental Kharma or RentTrack. These services take bills you’re already paying and apply them to your credit report. Experian Boost even allows your cell phone and utility bills to be reflected in their reports. Remember, when building credit every little bit helps, but every little bit can also hurt—so pay those bills on time!
Be someone’s authorized user
This falls under the trust category again. Someone who knows and trusts you well enough to add you as an authorized user on their own card can be a huge assist in helping you build your credit. Check the strength of your relationship and make sure you both understand and agree on card usage and bill payment. Also, be sure the card’s activity is reported to the credit bureaus or all your efforts will be wasted.
Building credit can be tricky and fraught with dangers. But with responsible practices and smart strategies, you can begin accumulating a strong credit score and reaping the rewards surprisingly short amount of time.