We’ve spoken quite a bit in previous blog articles about the importance of your credit score. A bad credit score impacts your entire financial life. In fact, bad credit impacts everything in your life.
We have also spoken about how to repair your credit score, such as a credit card debt consolidation loan. And, we’ve talked about the elements you need in your financial strategic plan, such as budgeting, paying your bills on time, saving for emergencies and retirement, and so forth.
You Need to Build Credit
But if you are just beginning to spread your own financial wings, then you need to know how to build credit in the first place. Of course, you still need to budget, avoid binge spending, pay your bills on time, and save for emergencies and the future. If you do these things, you will be building good credit simply because you won’t need to access financing or credit cards to cover your expenses.
No Credit is Like Bad Credit
No credit will have the same impact as poor credit. When you get to the point of applying for financing, to buy a car, for example, the lack of credit will hurt you. The bank, a credit card company, even your landlord, will want to see your credit history. If you don’t have one, it’s going to be a problem.
There are people who want to operate on a cash-only basis and never build credit. You can live your life cash-only, but as mentioned before, your credit score impacts so many facets of your life.
These days, everyone from your potential landlord to a potential employer will check your credit report. If you are applying for car insurance or at some point will want to buy a home, not having credit could cost you money in less favorable lending terms.
If you have a good credit score, your insurance premiums will be lower, the rates on that mortgage will be much more favorable, and your potential landlord or employer will be more comfortable developing a relationship with you.
How do you build credit? Here are six easy ways to do it.
Become an Authorized User on Someone Else’s Credit Card
If your parents are willing to add you as a user to their credit card account this is an easy way to build credit. You should agree on some rules around your usage of the card and your responsibility for paying the bill, but this is a great first step toward building credit. Be sure that your name is officially added to the credit card account. If you need to supply your social security number, then you know you are being added to the account.
Secured Credit Card
A secured credit card functions the same as a regular credit card, however, your charge limit is tied to a specific amount that must be in your bank account. This amount must be held as a security deposit in your bank.
Unlike a debit card, you are only charged monthly. Your pattern of payment is reported to the credit score agencies. Because there is a security deposit, credit card companies are more likely to issue you a card even though you have no credit history.
This is a great way to build credit and, if you pay the bills on time, your credit score will get off to a great start. Once you have established a good record of charging and paying, you can apply to upgrade to a regular credit card. Whatever is left in your security deposit will be returned to you.
Retail Credit Cards
You have probably been approached already by store credit card merchants asking you to apply on the spot for one of their brand credit cards. Usually, they offer an immediate discount at checkout.
This CAN be a good way to build credit but keep in mind that the fees and interest rates tend to be much higher than normal. AND, remember that just because you have a store credit card, it is not a license to buy everything you have always wanted.
You still must pay the bill. If you are not careful, you will build problems for yourself instead of good credit.
Financing your education with a student loan will build credit. College student loan providers do not require a credit score. Your student loan payments will be reflected in your credit score. Of course, defaulting on your student loan is not going to be the way to build credit that will help you.
Credit Builder Loan
Credit builder loans are designed to do just what the name implies—build credit. You can obtain one of these at your local credit union. These are installment loans, with a repayment period of usually no more than 18 months. The loans are fairly small.
Your payment history is shared with the three major credit reporting agencies. The amount you borrow is placed into a savings account for your benefit. Once you pay off the loan, you have access to the funds in the savings account. Be sure to make the payments on time, pay more than the minimum and you will build credit that will help you in the future.
Typically, your rental payments are not going to help you build credit. This does not mean that you can be sloppy with making your rent payments on time. If nothing else, you are building a reputation.
However, there are some special companies that will, for a fee, report your rental payments to the credit reporting agencies. Your landlord also needs to participate in the process. Rent Reporters, Rental Kharma, and RentTrack are three examples to check out. For a small fee, this can be a very easy way to build credit.
How Long Does It Take to Build Credit?
Under normal circumstances, it will not take you more than 12 months to see the fruits of your efforts. Depending upon the strategy you employ, you might see a credit history emerging as soon as 6 months.
What is most important is to pace yourself. Do not open a lot of credit card accounts. Watch your credit utilization. And, yes…pay your bills on time!