Your credit history affects the financial options you have in life. The higher your score, the more opportunities you have to create the life you want.
Striving to build credit history can have many benefits, from lower interest rates when making a large purchase to landing that job you applied for. But for many people, it can be a little hard to build credit a good credit score when they don’t have a credit history.
This is especially true for younger people who’ve never had credit transactions and are considered to be high-risk borrowers.
Here are a few ways to start building a good credit history from scratch.
1. Become an Authorized User
If you’re under the age of eighteen or have younger children and want to give them a jumpstart on credit, you might be able to do this for them. As a young person who can’t apply for a credit card, you could be an authorized user of another person’s credit card.
This can be a good option for parents and younger children who want to teach their kids good habits of credit use and have something to rely on in case of emergencies.
It is important to note that this will make the main holder of the card responsible for all the actions the authorized user takes on the card. Also, some credit cards come with annual fees for authorized users. So, it is important to assess whether this option is the right one for you.
2. Use a Co-Signer to Build Credit History
Here’s when someone with a good credit history helps you apply for a credit card.
If you’re at least eighteen years old, this makes it easier to get approved for a credit card, since you have someone else with a good credit history to vouch for you. Unlike becoming an authorized user, both you and the co-signer will be on the hook to repaying the loan.
If the main cardholder can’t repay the loan back, the co-signer will be responsible for the balance. If used irresponsibly, credit cards can not only hurt your credit history but your co-signer’s credit as well.
As a co-signer, it is important to assess the risk you will be taking before co-signing anyone.
3. Apply for a Secured Credit Card
These types of credit cards are typically for those who don’t have a credit history yet. If you’re over eighteen, you can apply for a credit card where you put down a certain amount of money as collateral in case you default on your payments.
Since you don’t have a credit history, the banks don’t like taking much risk, which is one of the reasons they ask you for money upfront.
Here, you have to prove that you make enough money to be able to repay your credit card balance. You can avoid the upfront payment by applying for these cash loans.
4. College Loans
If you are a college student who has student loans, you can boost your credit by making your loan payments on time.
Keep in mind that late payments can also negatively impact your credit score, so it’s always recommended to have an automatic payment system in place to avoid late payments.
5. Car Loans
Car loans can also be a way to build a credit history if you make your payments on time. Of course, it doesn’t make sense to buy a car just to build credit.
It’s always recommended to buy what you can afford, and buying a car in a one-time payment won’t give you credit, but it’ll save you money on interest. This is not the most recommended way to build a credit history, but it is an option.
6. Mortgage/Rent
Homeowners can build their credit by making on-time payments on their mortgage. In some cases, if you’re renting, you might be able to build credit by making on-time payments on your rent. That is if your landlord reports your payment history to the credit bureaus.
You might also be able to ask your utility provider to send your payment history to these reporting agencies and this can help with your credit history building.
7. Do Not Spend More Than You Can Afford
Just because you have a credit limit of $5000 and only have a minimum payment of twenty-five doesn’t mean it’s a good idea to spend it all.
Something that is recommended is using your credit card for expenses that you normally already have and have the money to pay them. This will keep you from overspending and keep you from paying those high credit card interests.
If you make your payments on time, you get to keep your payment history and good standing, which is good because this has the biggest impact on your credit.
8. Keep Your Credit Utilization to a Minimum
Credit utilization simply means how much you owe from your total credit available. For example, let’s say that Tom and Susie both have credit cards, and both have a $1000 credit limit on their accounts.
Every month, Tom takes $1000 out his credit card and pays that off at the end of the month. Susie only charges around $100 a month to her account. And just like Tom, she pays off her credit card every month.
Now, based on this alone, who do you think will have the better credit score? If we only consider this factor, Susie will have a better credit score because Susie kept her credit utilization to a minimum.
Many experts say that keeping your credit utilization under 30% gives you a good standing status to lenders and helps you boost your credit. And if you keep it under ten percent, it will give you the best results.
Boost Your Credit Score
A good credit score can be useful since some employers check your credit score to assess your responsibility level.
It is important to build credit history well because mismanaging credit can be very financially dangerous. So to help with that, make sure you check out this article on money management tips.
