Before you take a big life step like getting a car loan or a mortgage you’ll need to have a good credit history so lenders see that you are likely to repay the loan and therefore give you a good interest rate. So, what's the best way to start building credit history? Well, there are a few different ways to start building your credit, including using a credit card or a loan.
Build Your Credit With A Credit Card
1. Get A Secured Credit Card
A secured credit card is a way to start building your credit if you have no credit history. You will have to put a cash deposit down, which is usually the same amount as your credit limit, which you will receive when you close the account. Then you use it like a regular credit card and buy things with it and pay it back monthly. You’ll have to pay interest if you carry a balance, so it’s best to pay it off monthly like you would a regular credit card. If you think you may not be able to pay it off monthly then you shouldn’t spend the money, after all the point of this is to improve your credit. Be sure the card issuer reports to all 3 credit bureaus and find one with a low annual fee.
2. Open A Credit Card With A Co-Signer
If you have a parent or spouse with good credit, you can ask if they will co-sign on an unsecured credit card with you. This means that you will benefit from their credit history by getting approved for the card and beginning to build your credit history. However, the co-signer bears the same risk as you if you are irresponsible with the credit card. You should already be committed to making your payments on time and paying off your credit card in full each month, but if someone else’s credit is on the line you need to be even more responsible.
3. Get A Retail Or Store Credit Card
In general, it is easier to get approved for a retail credit card than an unsecured credit card. This is because you are more likely to shop at that store if you have the store credit card. Given that, retail cards usually have high interest rates so only open a retail card if you are 100% sure you will pay it off in full each month. Also make sure that the card issuer reports to all 3 credit bureaus before applying.
4. Become An Authorized User On A Credit Card
This is similar to getting someone to co-sign on a credit card application with you, however if you are an authorized user on a credit card of someone with good credit you benefit and bear no risk. First, find out if the card issuer reports authorized user activity to credit bureaus. If so, you would get the entire card’s history added to your credit history, which can boost your credit. Keep in mind that you bear no risk, so you have no legal requirement to pay off any balance. For this reason, the card holder may add you as an authorized user but might not give you a card to use. This is fine if the sole purpose is to build your credit.
Build Your Credit With A Loan
1. Take Out Student Loans (Only If You Need To)
If you need help paying for school, you can get student loans and this will help build your credit if you make your payments on time. You shouldn’t take out a loan if you don’t need it since there are many other methods to start building your credit. Student loans can really accumulate depending on how much your tuition is so be sure it is necessary to take out loans. If you go this route, be sure to pay each month on time. You can set up automatic payments to make sure it doesn’t fall through the cracks.
2. Get A Credit-Builder Loan
The sole purpose of a credit-builder loan - you guessed it - is to build your credit. They do not require good credit to get approved. You make monthly payments to the lender who reports them to credit bureaus and you receive the money at the end of the loan. You don’t get any of the money until you have paid all of the monthly installments, this way the lender doesn’t have to take a chance on you paying back their money. It’s like a savings account, except you will have to pay interest and may have to pay a fee to open the account.
Self offers credit building loans starting at only $25 a month. They report to all 3 credit bureaus and have helped over 700,000 people improve their credit.
Build Your Credit Without A Credit Card Or A Loan
1. Rent Reporters
If you are a renter, your rent is not reported to credit bureaus like mortgage payments. So you're basically missing out on a boost to your credit score! However, with RentReporters you can get up to 2 years of rent payments added to your TransUnion and Equifax credit reports. This means that credit scores that use these credit reports in their calculation will increase if you have paid rent on time each month. On average, people who use this service see an immediate credit score increase of 40 points.
2. Experian Boost
When you get your FICO credit score from Experian for free, you can opt in to Experian Boost. This allows you to improve your credit by adding payments that are left out of your credit history, like cell phone and utility bills, to your Experian credit report. This will only affect your Experian credit report and thus will only improve credit scores that use Experian’s report in their calculation. This can be a good and easy alternative or supplement to other steps you might take to get your credit history started.
Before you apply for any of these credit cards or loans, you should get your free annual credit reports from each credit bureau and read through them thoroughly. If there are any errors, you should report them to each credit bureau. Wait until all discrepancies are resolved before applying for any credit accounts.
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