As a consumer, trying to build credit can be challenging to establish creditworthiness. This is especially true for those new to the world of credit. Without a history of borrowing and repaying debt, these individuals can find themselves in a Catch-22 scenario.
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This may not be an immediate concern for those who primarily use cash and don’t plan on borrowing money in the near future. But what happens when the time comes to finance a car, take out a mortgage, or rent an apartment? A strong credit score is often required for these types of activities.
Trying to build credit from scratch may seem impossible, but it is possible with some dedication and effort.
Becoming An Authorized User
There are many benefits to having a credit card, but it can be challenging to build credit. One way to get around this is by becoming an authorized user on someone else’s credit card account. As an authorized user, any purchases you make will become part of the primary cardholder’s account balance. This can be a risky strategy for the authorized user, as they will be held liable for any bad behavior on the account, such as missed payments, collections, or bankruptcy. There is also a risk for the primary cardholder, as the authorized user could max out the card and leave them with the bill.
As an authorized user, you can enjoy the benefits of someone else’s credit card, including building up your credit history. However, it’s essential to understand the terms and conditions of becoming an authorized user before you enter into such an arrangement.
Specifically, find out from the issuer whether you have the power to remove yourself from the account and what would happen to account information – good or bad – that’s already on your report should you no longer be an authorized user. Additionally, regularly monitoring your credit report is crucial to ensure that the account is reported to one of the three credit bureaus (Equifax, Experian, and TransUnion).
By taking these precautions, you can ensure that becoming an authorized user is a positive experience that helps boost your credit score.
Try A Secured Credit Card
One possible solution for people trying to build credit histories who have trouble qualifying for unsecured credit cards is to apply for a secured credit card.
With a secured credit card, you have to put down a cash deposit as collateral, which typically determines the size of your credit limit. The deposit usually equals 50% to 100% of the initial deposit. Although this limits how much you can spend, it allows people with damaged or limited credit histories to qualify for a line of credit.
Making timely payments on a secured credit card is an excellent way to build credit. Some cards will even automatically graduate to traditional (unsecured) credit cards after the cardholder has demonstrated a history of making timely payments.
When choosing a secured credit card, beware of the ones with lots of charges, such as application fees, annual fees, and maintenance fees. It is possible to find good cards that don’t have these hidden charges—even ones that offer rewards!
Do Small Purchases
Your credit score is essential because it is one of the main factors lenders look at when considering whether or not to give you a loan. A good credit score can help you get approved for a loan with better terms, whereas a bad credit score may mean you get rejected for a loan entirely.
However, one thing to keep in mind is that even the best credit scores can disappear after ten years unless you take active measures to keep them up. This is because some scoring formulas can’t generate a credit score unless there has been recent activity on your account.
New credit consumers may wonder how long it will take to build a credit score. According to FICO, the oldest account on your credit report must be at least six months old for you to be scored. However, VantageScore says that a consumer’s credit report could be scored after paying on a credit account the first month. So it depends on which scoring model is used. One way to start to build credit is to make a small purchase on one of your existing accounts and pay it off immediately. This will give you the recent activity in which the scoring formula needs to assign a score.
Your Monthly Rent Payment Should Be Reported
Your rent payments each month could help boost your credit score, even though it typically isn’t reported.
Experian offers a service that allows individuals who rent from landlords or property management companies (that don’t already report data) to sign up and collect their rent payments electronically. This also can report your rental payment history to Experian RentBureau.
Even if this isn’t an option for you, other rent-reporting services can help boost your credit – although they come at a cost. So using a third-party rent payment service might not be the most cost-effective method to build your credit, but it is worth considering as an option.
Store Cards
When it comes to store credit cards, proceed with caution. Although they are usually easier to qualify for than standard credit cards, you don’t want to be in financial trouble. However, using a store credit card responsibly can help you build credit.
For example, let’s say you frequent a particular grocery store. You may want to consider signing up for a store credit card to build credit while you’re already making your monthly grocery purchases. In this way, your trips to the grocery store become expenses that can help improve your credit score.
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Remember that store cards often come with higher interest rates and lower credit limits than traditional credit cards. So, if you do decide to go this route, establish a strategy to pay off your entire balance each month. This will help avoid high-interest charges, which could damage your credit score instead of helping it.
Final Thoughts
Building a solid credit history is essential for anyone who plans to borrow money. There are a few easy ways to get started on the right track. Keeping your balance low and making regular, on-time payments are two of the most important things you can do. It may take a few months before your payment history starts to show up on your credit score, but it’s always better to start working on building your credit early.
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