Credit is an essential part of the modern life. Whether you’re buying a new house or car, seeking employment or looking to upgrade your utility services, companies and organization are likely to ask a credit report from you. Unfortunately, many people find it difficult to establish credit from scratch.
In most cases, you need some sort of personal loans or credit line with credit issuers who report to credit bureaus to generate a credit report for you. But fortunately, there are savvy and smart ways that help you build credit over time, and most of them are just a matter of minding your finances responsibly.
How to Start Building Credit
The credit card is the fastest way to start establishing credit from the ground up, but this option is not always readily available to all people. Credit issuers always look for your credit report to determine whether or not you qualify for their credit lines. However, if you’ve never taken credit or personal loans before, it’s impossible to generate a credit report. The lack of credit report disqualifies you for a credit line, while the lack of credit line hinders you access to a credit report. And the cycle goes on and on.
If getting a credit card is a challenge and you would like to build credit, there are other easy ways to it.
Opt for an entry-level credit card
You can apply for a secured credit, retail credit card or student credit card (if you’re in college) and use them as stepping stones to eventually get a full-fledged credit card. These types of credit card typically have a lower limit and not the best interest rates, but as long you obtain them from an issuer that reports to the credit bureaus, you can use them to build credit.
Get a Co-Guarantor for a Credit Line or Personal Loan
Getting someone to co-sign your credit line, or personal loan can help you build credit. Since you don’t have the credit history to show to potential lenders, the co-signer vouches for you. You must understand though that the co-signer becomes liable to pay off the debt should you become negligent or delinquent. However, if you approach financial management with focus and commitment, handling a few personal loans or credit lines through this method can help you establish credit standing.
Become an Authorized User
Another excellent way to jumpstart credit building is to become an authorized user. Your parents, partner or close relatives can allow you to become an authorized user of their credit line. This way, you wouldn’t have to go through the credit card application process. You can use the credit as any regular credit card, and the primary card owner is the one liable to settle the debt. It helps if the primary card holder already has a sound credit history, to begin with, as it’s likely that he/she will settle the bill responsibly. You also need to do your fair share of watching your purchases, so you don’t max out the credit limit. Keep your credit utilization rate low to build up credit fast.
Sign up for Credit Builder Loans
Credit builder loans are forms of personal loans which allow you to build credit. The idea of credit builder loan is that you take a loan from the issuer or financing institution, but the cash isn’t released to you right away. Instead, you pay off the loan as you would with most personal loans. By the time you’re done paying it off, the issuer releases the loan amount to you and you can then use it for any purpose. Credit builder loans are excellent in teaching you patience, discipline and commitment. And as long as you get the loan from an issuer that reports to the credit bureaus, all your financial activities made on that loan should reflect on your credit report.
Best Ways to Build Credit Fast
One thing is for sure: you can’t build credit overnight. It doesn’t mean that when you pay off a loan or debt in full this month, your credit score will automatically rise. Instead, you need to imagine credit building like a grading system in school. You need to get A’s (most, if not all) for most of the subjects to come up with a high grade at the end of the school year. Now, if you failed Science and Math and then you had a couple of absences, expect for the grade to drop.
Therefore, you need to strive hard on all, if not most, areas of your credit report to increase your score over time.
According to FICO, you can generate a credit score if you have an account with an issuer that reports to the bureaus for at least six months. It can take a long time to build an excellent score. Additionally, a taint on your credit report, say bankruptcy, can take around seven years to remove from your records. With that said, you must handle your credit score properly and efficiently so you can build and maintain good credit over time. Here are the best practices you should follow to achieve a desirable credit standing.
Keep Credit Applications Few and Far in Between
Credit issuers regard you as a high-risk borrower if you’ve had too many credit inquiries in a short span of time. They take it as a sign that you are in desperate need of credit and you might not be managing your finances properly. All those accumulated “hard inquiries” can take a toll on your credit record.
The smart way to apply for credit is to keep them few and far in between. Space out your applications to establish and maintain a healthy credit standing.
Pay Your Bills Promptly
Late payments are taken as a red signal that you’re negligent about your finances. A single late payment can negatively impact your credit score instantly. You need to make a couple of prompt payments to raise your score back up.
Pay your bills diligently and in a timely fashion to build credit fast. You can set a reminder a couple of days early to make sure you don’t miss your due date, or take advantage of automated payments so that you don’t have to worry about late payments anymore.
Don’t Open New Accounts or Close Old Accounts Impulsively
So, you just finished paying a few personal loans or no longer using a credit line, and now you’re thinking of closing up those accounts. After all, you’re no longer using such credit line anymore. But the thing is, the age of your accounts can make quite an impact on your credit score and closing old accounts is not always a good move. Keep old accounts active even if you’re no longer utilizing it to strengthen your credit score.
On the other hand, you wouldn’t want to open new accounts in such a short period. Lenders typically see this is a sign of financial desperation which increases the risks of lending you credit. Open a new credit account only if you need one, and don’t do it for the sole purpose of perks and rewards. The backlash on your credit report could hurt you more.
Have a Good Mix of Credit
Having one or two credit cards is an excellent place to start, but over time, you’d want to consider adding a few more credit lines, such as personal loans, mortgage, auto loans etc. to obtain a good mix of credit.
Having a good credit mix tells lenders that you’re able to manage more than a few financial obligations well. Variety of credit not only spices up your credit report, it can actually improve your score. But don’t rush and open every new credit line or take a couple of loans available to you just for this reason. Adding and opening new credit is a matter not to be taken lightly.
Keep Credit Utilization Rate Low
Don’t max out your credit card. Don’t even go near maxing it out. Credit utilization rate refers to the ratio between your used credit vs. your available credit. It is computed for every credit account and for the combined credit accounts. If you max out one credit card this month, you’ll see a dramatic dip in your credit score.
As much as possible, keep your credit utilization rate below 30%. Meaning, if you have a credit limit of $10,000, don’t spend more than $3,000. Having low credit utilization rate not only helps you manage your bills and debts more effectively, but lenders also take it as a sign that you don’t overspend. Pay your monthly bills in full and in time to check out your balances, and never make a purchase you know you can’t afford.
Monitor Your Credit Report
Checking your credit doesn’t necessarily increase your credit score, but it tells you the areas to improve on to bring that digit up. You can pull out a free credit report once a year from the three main credit bureaus and you should use this time wisely to check your report for, well, everything.
While you’re at it, you should also check whether all entries are valid and correct. It’s possible for an error to taint your report and pull your score down. Identity theft, for instance, is a rampant case and it could be affecting you without knowing it. Scan all the accounts, verify the details and make sure you’re paying only your financial obligations, not that of someone else’s. Identity thieves may also use your name and social security number to charge their expenses on your account, and when left neglected, could hurt your credit score a lot.
Financial Habits That Can Ruin Your Credit
Spending is a necessary event, but when you do it to satiate the emotions more than the actual need, you could hurt finances. Emotional spenders feel euphoric at the moment of purchase, not necessarily with the item being purchased. The worse thing is they do it at the expense of debt, leading them into an even deeper hole.
If you tend to spend from an emotional standpoint, rein yourself in. Acknowledge that you have a spending problem and seek help if possible. You can get an accountability partner to help assess whether a purchase is necessary or not. Also, give your time to think, say 48 hours, before deciding if the item is worth the purchase.
Keeping Up with the Joneses
Are you feeling envious or insecure about the things your next door neighbor has? Do you want to buy the same items, or even get the more expensive, higher level version? Are you willing to do it at the expense of debt?
Keeping up with the Joneses is a mentality that kept many people in debt. Consequently, their credit scores suffer from the irresponsible purchases. You don’t have to buy what they do to lead a good life. You just need to put more value on the things that matter more to you.
Living Without a Financial Plan
Do you have a financial plan in place? If not, it’s easy for you to get into a financial mess resulting to a poor credit score. A financial plan tells you what you want to do with your money – how to save, spend, invest and pay down debts. You also have both short-term goals saving for a spring break vacation, as well as long-term goals, like retirement. Financial planning is also not a one-time event. Your plans could change from year to year, or when you’re achieving life’s milestones (such as getting married, getting a promotion, moving to another country etc.). Having a solid plan gives you a more concrete idea on how to manage your finances at various points in your life.
Building credit can seem daunting for the first-timer, but we all need to start somewhere. Fortunately, getting started is just the easy part. The more challenging aspect is how to improve and maintain your credit standing so you can access better financing deals and opportunities.
Disclaimer: Content found on loanreviewhq.com has been created to be used for informational purposes only and help readers achieve a basic understanding of their finances and financial options. The content is not intended to replace or usurp financial advice from professional accountants, CPAs, etc. If you you’re seeking financial advice, always present any questions you may have regarding your finances to a professional. Never disregard professional advice because of something you read on the internet.