Building your credit means improving your credit report and credit score by making payments on time, and practicing overall good financial habits. Building and maintaining good credit is one of the most important actions you can take towards financial stability.
Unfortunately, not everyone is taught good financial habits while growing up. Some 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’ll need to learn about healthy borrowing and credit habits. The sooner you start, the easier it will be in the long run. Building your credit means taking practical steps to improve your credit history and your overall financial situation.
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 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 making timely payments. Secured credit cards, like regular credit cards, require minimum monthly payments by a certain due date. Your best option is to pay off your balance in full by the due date, to avoid interest charges and additional fees. 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.
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 credit history a boost. The owner of the account you are associated with should have a clean credit history, low credit utilization ratio, and preferably an account that has been open for over two years.
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 bureaus on your behalf. Some of these services include PayYourRent, RentalKharma, and Rent Reporters.
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%.
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. 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.
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