Ten Best Ways to Establish Your Credit
Before you can purchase a new car, a home, or any other major item you plan on buying with credit, you need to make certain you have established a good credit record. Many people can get approved for a line of credit with bad credit, but it can actually be more difficult for those who have no credit history at all. If you don’t have any credit or very little credit, here are 10 of the best ways to establish this all-important history.
Get a Credit Card…But Make Sure to Use it Correctly
Many people assume that getting any type of credit card is all they need to do. That’s not exactly the case. First, you want to make certain that the type of credit card you get is a secured card. This may actually be the only type of credit card you can get if you don’t have any credit history. A secured credit cardrequires you to make a cash deposit up front. This is done because you have no history of credit for the card issuer to examine. They don’t know if you’re going to pay on time or not, so they’re taking a risk on you.
After you’ve used this card for a while and have established a credit history, you can close the credit account and get your deposit back. Then you can apply for unsecured credit cards that don’t require a deposit.
Get a Store Credit Card
If you don’t have the money to make a deposit for a secured credit card, you may still be able to get a credit card from a store such as Best Buy, Walmart, or Target. These credit cards aren’t weighed as heavily as unsecured cards are, but they can be used to show that you can make monthly payments on a line of credit. Just remember that you only need one or two of these cards at most. Otherwise, you may find yourself with multiple monthly bills to pay.
Loans Can Help
Loans such as car loans will help you establish credit. The downside here is that you often can’t get an auto loan without having credit. Fortunately, you can get a co-signer who has established credit to help you. For most young drivers, that co-signer is one of their parents. Having a co-signer is a great way to start building credit without having any history of borrowing, but you do have to be careful. If you don’t make the payments, your co-signer becomes responsible for them.
Note that student loans can help build your credit history, but they don’t actually appear on your credit until you’ve started paying them back. For most, that isn’t required until you’ve been out of college for six months.
Have a Co-Signer for a Credit Card
You can also get an unsecured credit cardby having someone co-sign for it. Again, the co-signer will need to have good credit and must be willing to take over the monthly payments if you cannot make them.
Get a Credit Builder Loan
ACredit Builder Loanis designed to help build credit. Generally, the loan amount is fairly small, and you don’t actually get the money up front. Instead, the money is placed in an inaccessible account until you’ve completely paid off the loan. In a way, it’s like a savings account that you haven’t earned yet. Once you’ve paid it back, you can take the money out of the account and use it in any way you want.
Make Your Payments on Time
Even if you don’t have a line of credit, you can build up your payment history by making all of your rent, utility, and other payments on time. While these payments may not positively impact your credit history, missing too many payments can negatively impact your history. This is especially true if your unpaid bills are sent to a collection agency.
Hold Down a Steady Job
Most credit applications are going to ask you for your employment information. If you can show that you’ve been at the same job for a year or more, it shows that you have a stable income. If your employment history includes large gaps or shows that you change jobs frequently, it can make some lenders hesitant to approve your application. That shows that you may be jobless again soon, making it difficult or impossible for you to make your monthly payment.
Don’t Go Crazy with a Credit Card
If you get a secured credit card or have a co-signer help you get an unsecured card, don’t immediately charge up large balances. Instead, do your best to keep your balance to no more than 30 percent of the limit. This keeps your credit utilization low, which helps improve your credit score. If you’re constantly spending up to your limit or even going over your limit, it’s a warning sign to lenders that you don’t manage your credit well.
Keep Your Accounts Open for As Long as You Can
This length of time you’ve had a line of credit, specifically a credit card, will also help establish and build up your credit. Loans have a finite period in which they will be paid back, so you will obviously not be able to leave those lines of credit open past their agreed-upon time period. With credit cards, however, the account is open until either you or the card issuer closes the account.
If your credit card has an annual fee, you may not want to keep that account open. However, for a card that doesn’t have a fee, it’s a good idea to keep the account open even if you’re not using it. Do be aware, though, that some lenders do close accounts that haven’t been active for a year or longer. It may be a good idea to periodically use the card for small purchases.
Don’t Open Many Lines of Credit at Once
When deciding how to build your credit, pick only one option. Opening several retail credit cards, a secured card, and a credit building loan all at once can be damaging, especially if you charge up multiple high balances. Also note that if you open a new line of credit several years later, it will impact your average account age. That can also have a negative impact on your credit.
These ten ways will help you establish and build your credit. Again, you don’t need to make use of all of these methods – a loan, retailer credit cards, and secured credit cards or unsecured cards with a co-signer can all help you establish credit, but not if you take out one of each.
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