How to establish credit
If you're just starting out, or if you've never had a credit card before, you may be wondering how to establish credit. No one tells you about it at school, and it's not like it's something you can just guess. Most people don't even think about it until it suddenly becomes very important, like when you're trying to buy a car or a house.
The good news is, in most cases, establishing credit is not as difficult as it may seem. There are many ways to start building up a credit history and show businesses that you're a responsible borrower (and no, a promise to be good won't cut it). Whether you're just starting out or you've been working on your credit for a while: businesses are looking at how likely you are to repay what you borrow.
Being rejected for credit can be discouraging, but don't give up. Use the tips below to build your FICO score—eventually, you'll have the credit history you need to get approved for the things you want, even that pair of shoes you don't really need—you know the ones.
Understand the basics of establishing credit
The first step is understanding how credit works and what lenders are looking for when deciding your creditworthiness. Businesses that lend money or extend credit want to be sure that you will repay what you borrow. They use your credit history to determine if they can trust you enough to do that.
Lenders may also look at other factors, such as your income, employment history, and assets. But if you have limited experience with borrowing money, your credit history may be the most important factor in getting approved for a loan or credit card. And even if you get approved, banks will use these factors to cap how much credit you get, so it pays to be trustworthy.
There are two types of information that make up your credit history: positive and negative.
Positive information includes things like timely payments on loans or credit cards. Creditors love this.
Negative information includes things like late payments, defaults, and bankruptcies. Creditors hate this.
The information is used to create a credit score, which is basically a really important number used to rank your creditworthiness. The higher your score, the more likely you will get approved for loans and credit cards, the more likely you are to get approved for higher amounts, and the less you will pay for credit. The most common scoring system is the FICO score, which ranges from 300 to 850.
There are a few other things to keep in mind about your credit history:
You can have a somewhat short history and still get a good score. A VantageScore can be calculated within a month of an account showing up on a credit report, and a FICO score requires 6 months of activity. Even if you're just starting to use credit , it’s important to manage your accounts responsibly from the get-go.
Your credit history is reported to the
, which are companies that keep track of this information. There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion.
You have more than one credit history. In addition to your personal credit history, you also have a business credit history if you own a business. No need to worry about the business one if it doesn't apply to you.
You may already have a credit history without realizing it. If you've ever had a utility bill in your name, for example, that's considered helpful information, and it will be reported to the credit bureaus. Similarly, if you've ever had a student loan in your name, that also informs your credit score, so make payments on time.
Either way, if you are looking at ways to establish credit or build up your credit history, there are a few options available.
How can you establish credit for the first time?
Establishing credit can take some time as information from creditors is passed to the credit bureaus, so you've got to be really patient during this process. If you have a big purchase coming up and you're looking to get credit, it's a good idea to start working on establishing credit at least six months in advance, even longer if you can.
Here are four ways to get started with establishing credit:
1. Look for credit-builder loans
A few different types of loans can help you build credit, but the most common is the credit-builder loan. These loans are designed specifically for people who need to improve their credit scores. Like other loans, you borrow a set amount of money with a credit builder loan and agree to make regular payments over a certain period, usually 12 to 24 months.
As long as you make your payments on time, the loan will be reported to the credit bureaus, and your credit score will gradually improve. Credit-builder loans can be a great option if you need to improve your credit but don't have the collateral for a traditional loan.
However, it's important to keep in mind that these loans often have high-interest rates, which is the amount of money you pay for the loan, so shop around and compare offers before you decide to apply for one. As with any loan, they will also report negative information to the credit bureaus if you miss payments, so you make payments on time to avoid any adverse effects on your credit score. Missing one payment may not be fatal to your score, but it can still have a negative impact, especially if you’re trying to build credit. Keep in mind that a history of non-payments can seriously damage your score.
2. Unsecured/secured credit card
Generally, there are two types of credit cards: unsecured and secured. An unsecured credit card is offered without any collateral attached. It may be harder to get this when you have no credit score, so a secured credit card could be a better alternative, and can help you work your way up to an unsecured card. Generally, with a secured card, you will “secure” your credit limit with your own money. This may involve paying a security deposit typically equal to your credit limit, or otherwise keeping money in a “locked account” to provide a guarantee of repayment to the lender. These funds are still your money, and you can get it back with no hassle if you close the account (unless you owe the creditor money).
For example, if you want a $500 credit limit, you'll probably be asked to put down a $500 security deposit. Your payment history will be reported to the credit bureaus regardless of which type of card you have, so making payments on time is crucial to establishing credit, and avoiding damage to your credit score.
Say you've been approved for your first secured credit card, you've made a few purchases, and you’ve made several timely repayments. If everything looks good, you may be able to upgrade to an unsecured credit card and get your security deposit back.
Use a cosigner
If you're having trouble getting approved for a loan or credit card, asking someone to be a cosigner can be a saving grace. You may be wondering what a cosigner is and how you find one. Good question, fam.
A cosigner is someone who agrees to be responsible for your debt if you default on the loan. This can be helpful because it shows lenders that someone else is willing to take on responsibility for the debt, making them more likely to approve the loan. If they look good, it makes you look good, basically. However, it's important to keep in mind that any missed payments will damage not only your credit score but also the cosigner's credit score.
As a result, it's essential to make sure that you are reasonably confident that you will be able to make the payments on time before asking someone to cosign for you. Otherwise, you could end up damaging your relationship with the cosigner and making it difficult to get approved for loans in the future.
Become an authorized user on someone else's credit card
If you have a family member or close friend with good credit, you can ask them to add you as an authorized user on their credit card. This means you'll have access to the account and can use the card for purchases, but the account holder is ultimately responsible for making sure the bill gets paid. Your credit score will benefit as long as the account holder makes their payments on time. This is something that has to be treated responsibly. Losing a dear friend is a high price to pay for better credit.
However, your credit score will also be negatively affected if they miss payments or default on the account. For this reason, it's important to choose someone you trust with a good history of making credit card payments on time. The most common option is to become an authorized user on a parent's credit card, but you may also be able to do this with another relative or friend.
Being an authorized user is a quick way to start boosting your credit score, but it can be a stressful experience when things don't go smoothly. Life gets in the way, payments get missed, and if this happens, your credit score will not improve.
Can you establish credit quickly?
Although a VantageScore can be calculated within a month of an account showing up on a credit report, keep in mind that establishing credit generally takes time. For example, a FICO score requires 6 months of activity. But, you can do a few things to help ensure you’re on the right track. One of the most important things you can do is to make sure you have a good credit history. This means paying your bills on time and keeping your debt levels low.
As you continue to establish credit down the road, it can eventually be beneficial to get a mix of different types of credit, such as revolving credit, installment loans, and lines of credit. It’s best to do this over time, however. It’s generally not a good idea to apply for too much credit at the same time, especially if you are just getting started with building a good credit history. It’s also important to make sure you’re living within your means and maintaining financial responsibility. This will show lenders that you can manage different types of debt responsibly.
Applying for a secured credit card or becoming an authorized user are likely the quickest ways to establish credit. But you need to be patient, as good credit won't appear overnight. Each provider will have different benchmarks for approving new types of credit, so you may not be approved right away.
In general, the best way to establish credit is to be patient, manage your finances responsibly, and keep your debt levels low. By following these tips, you can eventually build a good credit history that will help you get approved for loans and credit cards down the road. And then you can buy those limited edition Jordans or maybe a mortgage—whatever you want, really.
Can you check your credit score?
Yes, your credit score isn't only available to lenders; you absolutely have the right to see your history. You can check your credit score for free using a site like freecreditscore.com (part of Experian), and many banks and credit cards provide a free score.
Check your score every few months to ensure there are no errors and to track your progress. If you see a sudden drop in your score, it could be an indication of fraud or identity theft. In this case, you should check your credit report for any errors and notify each affected credit bureau.
Monitoring your credit score is an excellent way to stay on top of your financial health. By checking it regularly, you can catch errors early and take steps to improve your score if necessary.
Don't rush. If you take on more debt than you can afford in an attempt to press fast-forward on your credit-building journey, you could end up getting into trouble, and damaging your credit score instead.
You can establish credit best by being patient and frugal and making your payments on time. Banks and other lenders are required to lend responsibly, so they need to know that you can handle credit before they will offer you a loan.
Always compare different offers to get the best terms possible. Just because you have no credit history doesn't mean you have to accept high-interest rates and fees. Never settle. Plenty of options are available for people with no credit, so shop around until you find the deal that's best for you.
If you're still having trouble getting approved for credit, the best options are to apply for a secured credit card or become an authorized user on another person's card. It's important to understand the risks involved with each option before you make a decision.
By following these tips, you can slowly but surely build up your credit history and improve your credit score. This will give you access to better loans and credit cards with lower interest rates in the future, and isn't that just peak-level adulting?
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