So you’ve found yourself with a less-than-desirable credit score—or perhaps no credit at all. In a previous article, we covered the importance and benefits of building credit as soon as possible. To follow up, here are tips on how to do just that. Read on to learn how to build credit.
1. Apply for a credit card
Building credit from scratch? This is a good place to start. Simply walk into your bank or credit union, and ask to apply for a credit card. There are four major types, each with their own pros and cons: rewards, low interest, balance transfer, and secured. A credit card with a low interest rate is a good starting point if you plan on carrying balance. If this is more of an emergency card, look for one with high available balance and the lowest interest rate possible. Depending on personal interests, cards with special rewards may appeal more to you, including ones that offer cash back and mileage. It’s best to avoid carrying balance on rewards cards because they come with high interest rates.
2. Apply for a credit-builder loan
This type of loan is commonly offered by credit unions and community banks to help people build credit. In simple language, a credit-builder loan is a small loan that acts as a forced savings program. All payments are reported to credit bureaus, which, in turn, affects your credit score. In most cases, the money you borrow is held by the lender and isn’t released to you until the loan is repaid. A credit-builder loan teaches financial responsibility and trust between two partners. This makes good practice for when it’s time to apply for a car or mortgage loan. By then you’ll be prepared.
3. Get credit for paying rent
This option is so simple. You’re literally building credit for sleeping, eating, and watching TV inside your home or apartment. Who knew Family Feud could be so helpful? If you’re a renter, rent-reporting services like Rental Kharma and RentTrack may help build credit. These services take a bill you’re already paying (like utilities) and automatically put it on your credit report. Simple and convenient, right? Keep in mind that not all credit scores take these payments into account, but some do.
4. Become an authorized user on someone else’s credit card
“Mom, Dad, can I use your credit card?” Sound familiar? Turn that spending into a good credit score by becoming an authorized user. The card doesn’t have to belong to your parents; it can belong to a sibling, spouse, roommate, or whomever. As an authorized user, you’ll have access to a credit card to build credit history—without the legal obligation of paying the charges. Parents can also help build credit by acting as co-signers on certain documents. This way, most of the loan repayment responsibility falls on them.
You may also find it helpful to ask the primary cardholder (most likely Mom or Dad) if the card issuer reports authorized user activity to credit bureaus. If not, all those credit-building efforts might have been for nothing. But hey, at least you got some nice clothes out of it.
5. Apply for a share secured loan
A share secured loan uses your own money as collateral. When you attach a credit card to this loan, every time the credit card gets used, it spends some of your own money. The benefits of a share secured loan include a lower rate than most conventional loans, an easy way to establish credit, and convenient terms that last up to 10 years.
In addition to these tips, building up credit stems from responsible spending habits. For example, make all your payments on time—even when it comes to non-credit accounts, like utility bills. Also, avoid opening too many accounts at once because this lowers your average account age. Once you’ve built up a good credit score, which is typically in the 600-700 range, it’s important to check credit reports each year for any errors or mistakes. Several financial websites, including NerdWallet, Credit Karma, and Clear Score, offer free credit checking.
Ta-da! There you have it. Hopefully these tips lead you down the right path toward building credit.
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