Building and maintaining good credit is one of the most important actions you can take towards financial stability. A well-balanced credit report is important when it comes to making big life decisions; whether it be buying a house or a car, a college good education and much more.
We aren’t taught how to handle our money in school. People find themselves in trouble when they get out in the world and face their first big financial decision. With the way lending works today, you cannot be approved for a loan without providing reassurance that you can handle your financial obligations. Lenders want to see a solid credit history.
To form a stable financial foundation, you want to get involved with credit as soon as possible. The sooner you start, the longer your credit history you’ll have. If you are eighteen or older, you can start familiarizing yourself with credit in a few simple steps.
Get a Secured Credit Card
Lenders want to make sure they will get their money back from you, the borrower. They will not approve loans and unrestricted credit cards right from the start. Instead, they will suggest you to apply for a secured credit card. What is a secured credit card, and how can it help you build your credit?
To get a secured credit card, you need to give a deposit that the lender will use as collateral if you can’t pay back what you owe. Usually, the amount you deposit is what your credit card limit will be. This means that you can’t use your card to spend more than you have deposited to the lender.
The average deposit for a secured credit card is between $300 and $500. Many young people make their first mistake when they get their card and buy things that they wouldn’t usually buy. Even though it’s tempting, you’ll want to avoid this mentality. Instead, use your card for daily expenses such as going to get groceries, paying for gas — anything you would normally pay with cash.
The second important part involving secured credit cards is timely payments. Secured credit cards, like regular credit cards, require minimum monthly payments by the due date. Your best option is to pay off your balance in full by the due date, to avoid interest charges and additional fees – as well helping keep your credit limit at its maximum.
If you continue doing this responsibly for around 6 to 8 months, you’ll be on the path to creating a solid basis for your credit history and might qualify to have card graduate from secured to unsecured status, where your deposit may be returned to you in full.
Become an Authorized User
To become an authorized user, you need to have someone willing to add you to one of their accounts. This can be a close friend or a family member with a solid credit history. When you become authorized on someone’s account, you get a credit card that is connected to their bank account, except it has your name on it.
By doing this, the credit history of the account owner benefits your credit history. This is common for parents who want to help their kids have good credit as soon as possible. When you become an authorized user, this shows up on your credit report and gives your history a “jump-start”.
The owner of the account you are associated with should have a clean credit history, low credit utilization rate, and preferably an account that has been open for over 2 years.
When you become an authorized user, make sure the card reports to the credit bureaus, so you can get all the benefits mentioned above. It’s important you remember to make responsible financial decisions while you are an authorized user since the person who owns the account is held legally liable for your actions. Due to its implications, this should only happen with someone who you share a large amount of mutual trust with.
Rent Reporting Services
Chances are that paying rent is one of the biggest monthly costs you cover. Rent payments aren’t always included in your credit score. You should check with your landlord whether they report payments to the credit bureaus. If they do, then great! You don’t have to worry about anything, and your credit score will rise as long as you are regular and on-time with your payments.
If not, you can use a rent reporting service. These services will report any rent payments to the credit bureau on your behalf. Some of these services include PayYourRent, RentalKharma, and Rent Reporters.
Keep Your Credit Utilization Rates Low
Having a low utilization rate on your credit cards increases your credit score by a significant margin. Say your credit limit is $1000. If you spend less than $300 in between paychecks, you are keeping your utilization rate below 30%. This is where you want to be if you want to keep building your credit score.
The most optimal utilization rate is under 10%. This story has two sides. You can spend less — or you can increase your total credit limit. This is where multiple lines of credit come into play.
Multiple Lines of Credit
If your total credit limit increases and your expenses stay the same, your utilization rate decreases. This can be one of the best steps towards developing a good credit score, considering that 30% of credit score is determined by your utilization rate*.
However, you need to be careful as this is a double-edged sword. More lines of credit mean more responsibility and more paychecks. If you do not think you can handle multiple bank accounts and credit cards, you can always stay away from this approach and follow other outlined pieces of advice.
A Few Other Simple Tips for Building a Good Credit History
To have a good grasp on the concept of borrowing, it’s important to understand the factors which define different loan types. We will clarify the most common ones:
- Always make your payments on-time — payment history makes up 35% of your credit score*
- Keep old bank accounts and credit cards open — when you close an account, aspects such as average account age and credit utilization rates may get reduced. The longer your credit history, the better.
*According to the most common credit-scoring model
Building an excellent credit score will allow you to land amazing credit offers.