Good credit requires starting from somewhere. If creditors won’t give you credit because of a lack of credit history, where do you start? It sounds confusing, but there are simple ways. Building good credit isn’t as hard as it seems. Here we offer tips that help anyone build a good credit history.
Help From Family Members
Your family members can help you start life on the right foot. Here are a few favors you can ask of a trusted family member:
- Have Authorized Use
Authorized users may build up credit just for being placed on someone else’s credit card. Of course, that someone else should be someone who trusts you. Parents are a good option. You get access to the credit card, but using it isn’t necessary. As long as the cardholder uses it wisely, you benefit from the credit history.
Before choosing this option, research the credit card chosen. Not all companies report authorized users to the credit bureaus. A quick call to the credit card company will let you know the answer. You should also discuss your privileges of the card with your family member. Because use on your part isn’t required, it may be best to leave the card alone. You reap the benefit of a credit history and your relationship with your family member stays intact.
- Ask for a Co-Signer
Once you establish a little credit history, consider applying for an unsecured credit card or personal loan. If you only have one or two trade lines, you may need a co-signer. This differs from an authorized user. The co-signer has liability. Let’s say your dad co-signs on a personal loan with you. 3 months down the road you default on the loan. This damages your credit as well as your dad’s credit. When he co-signed, he agreed to take financial responsibility for the account. The creditor may come after your dad for the money if they are unsuccessful with you.
Credit You Can Secure Yourself
Don’t worry if your family members don’t have good credit or can’t help. There are simple ways you can start your financial life off on the right foot:
- Get a Secured Card
Many credit card companies offer secured credit cards. You give the credit card company a good faith deposit. This amount becomes your credit line. For example, on a $500 secured credit card, you pay the credit card company $500. You can now use the credit line. Just like any other credit card, you can charge and pay off your balance. You can continually reuse the $500. If you default on your payment, the credit card company takes the payment from the $500 deposit. You may then use your charging privileges. If you cancel the card and don’t owe any money, you receive the $500 back.
Secured credit cards should be a short-term option. They often charge annual fees and high interest rates. Once you build up your credit history, consider applying for an unsecured card. Read below to learn how to increase your chances of approval.
- Get a Retail Credit Card
Department store credit cards are often the first card anyone holds. They are usually easier to obtain because they have lower credit limits. Retail stores encourage the use of their credit card for higher profits. They may even offer incentives to apply. They also charge higher interest rates, though. Only charge what you know you can pay off.
Again, this shouldn’t be a long-term solution. Instead, use it to start building your credit. Once you establish yourself, you can stop using the department store cards.
- Look for Student Credit Cards
If you are a college student, you can apply for student credit cards. Just like retail cards, they offer low credit limits and high interest rates. However, they often come with promotions or incentives. Student credit cards often have high acceptance rates too. They are a great building block to an unsecured credit card or personal loan.
Tips to Create a Great Credit Score
Now you know how to start your credit score. How do you keep it high, though? Here are a few simple tips:
- Pay Student Loans on Time
Federal student loans don’t require a credit score. Students and their families qualify based on financial need. However, when you start paying your loans back, they report on your credit report. This begins 6 months after college graduation. Make sure you make your payments on time. Also make sure you pay at least the minimum amount due. This may not make a huge impact on your credit score, but every little bit helps!
- Make All Payments on Time
Student loans may help your credit score slightly. Credit cards and personal loans help even more. They can also hurt your score even more. You must make your payments on time. Even 1 late payment can ruin your fragile score. Make a habit of paying your bills well before they are due. This way you don’t risk accidentally missing a due date.
- Don’t Overuse Your Available Credit
Just because you have a credit line doesn’t mean you must use it. Only charge what you can pay off that month. You avoid interest charges and keep your credit score up. Your utilization rate affects your credit score. If you carry a balance, make sure it’s no higher than 20% of your available credit.
- Don’t Open New Accounts too Often
Only open one new account at a time. Once you establish a good history with one account, wait about 6 months to open another. Too much new debt at once can harm your credit score. It shows the potential of default. The age of your credit lines impact your credit score. Older accounts increase a score; younger accounts harm it.
- Ask for a Credit Line Increase
Once you establish yourself as a good consumer, ask for a credit line increase. This helps your credit score in several ways. It decreases your utilization rate and shows financial responsibility. Of course, if you run out and rack up that credit line, it can harm your score. Only use this option if you can refrain from using the available credit.
The largest takeaway here is debt isn’t necessary to build good credit. You need credit lines, but they don’t need a balance. Create a plan and stick to it. If you need a secured credit card or another card with an annual fee, make it temporary. As you build up your credit history, apply for better cards. You can then cancel the expensive cards that got you started.
We don’t recommend canceling any credit cards that don’t charge annual fees, though. Remember, the older the account, the better your credit score. Even if you don’t use the credit cards, they help you build credit in the end.
Start slow because you can’t build good credit overnight. With a slow and methodical process, you can have a good credit score within a year or two.