Building your credit is something you might not have spent much time on. Many of us don’t —until we need to. However, a good credit history will save you tons of money, especially when it comes to buying a house, a car, or other major purchases.
What is credit?
Credit is like a short-term loan. It’s borrowed money that you agree to pay back. Credit card interest is the fee you’re charged for borrowing money from the lender. The interest fee will be added to your balance if you do not pay off all your credit debt at the end of each billing period. Credit card issuers will give you a credit limit so you don't spend more than you can afford to pay back.
Related reading: How Your Credit Score Impacts Your Interest Rate
Building Your Credit Score
1 Become an authorized credit card user
One way to start building credit is to become an authorized credit card user on someone’s credit card account. Credit card companies say that being an authorized user doesn’t affect your credit score but the truth is, it can. As an authorized user, usually with a parent/guardian or spouse, your credit score will improve as the credit card that is paid back on-time.
2 Get a “training” card
Some credit cards are easy to get. They start you with low limits but when you pay them back on-time, they can be effective tools for showing your creditworthiness. Gas cards, student cards, and department store cards are good beginner credit cards. When you pay them off at the end of each month, you show that you are creditworthy and your credit score will improve.
Here are some quick but important tips for new credit card holders:
Pay off your credit card balance each month so you can avoid interest
Avoid carrying over a balance as much as possible
Monitor your credit score on a free credit monitoring site
Ask for a higher credit limit after you’ve shown you can pay on-time
Only spend up to 30% of your available credit
3 Become a renter
Your rental payment history can have a positive or negative impact on your credit score. Many property management companies report rental payments to credit rating bureaus. So your payment history will affect your credit score.
If your landlord does not report rental payments to the credit bureaus but you would like them to, you can ask them to report your payment history, learn more here.
4 Get a secured credit card
A secured credit card is one that you pay a deposit to the credit card issuer to open your account. The amount you deposit, “secures” the account. The line of credit you receive on your credit card is equal to the amount you put down as a deposit. For example, a $500 deposit will get you a card with a $500 line of credit.
5 Apply for a credit builder loan
Credit-builder loans are designed to help those who have no credit, poor credit, or are trying to improve their credit history. They are almost like savings accounts but you make payments for a specified amount of time. When you make payments toward this “loan”, the lender will report your payments to the major credit bureaus.
Once your repayment term is up or you complete the minimum number of payments, you “unlock” some or all of the loan and receive access to the funds.
Keep in mind that your credit score is like your reputation, it takes time to build! Be patient and the results will pay-off.
Sources
Credit Card Authorized User: What You Need To Know
Credit cards - Consumer Financial Protection Bureau
How Do Credit-Builder Loans Work?
How long does it take to build credit
What Is The Average Credit Card Interest Rate?
Your Source for a Truly Free Credit Report? AnnualCreditReport.com
What Is A Secured Credit Card And How Does It Work?
