Building good credit is much like the age-old puzzle of the “chicken and the egg” conundrum. You need a credit card to build credit, but how are you supposed to build credit without a credit card?
You might be wondering, why do I even need credit? Doesn’t borrowing money just mean unnecessary debt? The truth is, if you want to make transactions in our modern world, then understanding how to build credit is essential. Everything from taking out school loans, to becoming a homeowner, to renting a car and applying for an apartment requires credit. In fact, some employers can even use creditworthiness as a deciding factor in the hiring process, so it’s important to work towards establishing a positive credit history. Having a good credit score not only makes you attractive to borrowers, but it can open doors to a wealth of financial opportunities.
Applying for a credit card may seem like the most obvious way to build credit. With application forms flooding our inboxes and mailboxes daily, it can be difficult to filter through all the suggestions to find a method that fits your personal and financial situation. Whether you’re a college student who recently received an email about student credit cards or you’re simply interested in how to build a positive credit history, you can use this guide to start building your credit responsibly.
3 Easy Ways You Can Build Your Credit
There’s no one size fits all approach to building credit. You might be a new credit card holder or still researching what card type is best for you. There are a few options you should consider based on your individual circumstances when determining which card makes the most sense for you.
First things first, it’s important to know your credit score. Not sure how to get a free credit report? Turbo is here to help!
1. Build credit with a credit card
A credit card may seem like the most obvious way to build your credit, but it’s also a good option because using a credit card has direct influence on what’s factored into your credit score like payment history and credit utilization. It’s also one of the quickest ways to build your credit if used responsibly.
Secured credit cards: These require a cash collateral deposit that becomes the credit line for that account. For example, if you put $500 in the account you can charge up to $500. This card works much like a debit card, only you’re working towards building credit. After a series of good payments, it’s common for the bank to reward you by extending your credit line without requesting an additional deposit.
Student credits cards: These cards are a great first step in establishing credit and they often come with perks like short-term, interest-free financing and rewards geared towards students. However, just because you’re a student doesn’t mean you automatically qualify. In most cases you will need to demonstrate proof of income, and some cards may require a credit history.
Store credit cards: If you have little credit established, store credit cards can be a good way to help you build your credit. Banks approve much lower scores for store cards than they would normally allow if you applied directly for a bank credit card online. This is because banks promise retailers a certain approval rate, which then requires the them to approve customers that are typically considered too risky due to low credit.
2. Build credit with help
If you don’t have any established credit, chances are you may need a little help before being approved for a credit card of your own. This may be a good option if you have a friend of family member with good credit who is willing to assist you in the process of building your credit.
Credit card piggybacking: This practice is much like its name suggests and allows you to leverage someone else’s credit. In this scenario, the primary holder of a credit card adds you as an authorized user on their credit card. Your credit report then acquires the entire history of that credit card account which is translated to your credit score. This is a good option when building credit from scratch or to help give a low credit score a boost.
Get a credit co-signer: Another option is to have someone with good credit co-sign on your credit card. In this case, the co-signer is legally responsible for your debt if you are unable to pay. While co-signing isn’t typically offered by many major credit card companies, we recommend checking with your local credit unions or small banks to see if it’s available.
3. Build credit without a credit card
Using a credit card or leveraging help are some of the easiest ways to build a good credit score. But what if you don’t want a credit card or neither of those options are available to you? Whatever the reason, there are alternative ways to build your credit profile.
Credit-builder loans: These loans work the opposite way of a traditional loan or credit card because you borrow a specific sum, but don’t have access to the funds. Instead the bank or credit union deposits the money in a type of savings account. With this option, you begin repaying the amount and the lender sends your payment pattern and balance to the credit bureaus. Once you pay the balance, you get your money back, and in the process, you’ve helped build a positive credit history.
Federal student loans: These loans show up on your credit report, so if you’re a student, make sure to pay them on time to help establish a positive credit history.
Get credit for your rent: Most credit files don’t contain your rental history, however, all three major credit bureaus — Experian, Equifax and TransUnion — do include rent payment information in credit reports if they receive it. You may be able to take advantage of this by using a rent reporting service which takes a bill you are already paying and reports it to credit bureaus. In this case, on time rental payments can help you build a positive credit history.
Follow Smart Financial Practices to Build Credit Over Time
Building a good credit history doesn’t end with establishing a line of credit. The next step is to be proactive about your financial choices, balances, interest, and payments.
Don’t miss your payments
Making on time payments is of the utmost importance when it comes to building a good credit history. Any bill that becomes delinquent can wind up on your credit report and cause a ding in your credit score. Keep track of your billing cycle and due dates to make sure you never miss a payment. Always check to see if you can make use of any automatic payment features offered for added convenience.
Avoid paying interest
There are many good reasons to never pay your credit card bills late, but did you know there are also perks for being proactive about your payments? By carrying a balance on your credit card, you accumulate interest charges each day that are based on your daily balance. When you make a payment prior to the due date, you are lowering your average daily balance. This reduces your interest charges and helps you allocate the money you would’ve spent on interest for more important things.
Don’t open too many accounts at one time
You might be interested in shopping around to see who will approve you for a card, but think twice before going on an application spree. When you apply for a credit card, a hard inquiry is generated on your credit report and can lower your credit score. Since new credit makes up to 10 percent of your score, having several inquiries in a short amount of time can cause your score to plummet. Follow the rule of thumb of waiting three to six months in between credit card applications.
Keep your spending within your means
Following the rule of only borrowing what you can afford helps you keep your balance under control and lets lenders know that you are a responsible borrower. Steer clear of reaching your credit limits — In fact, FICO suggest that a good debt-to-credit ratio is below 30 percent to prevent your score from taking a hit.
Check your credit score annually
Now more than ever, it’s important to keep close tabs on your credit score. Not only can monitoring your credit help you keep an eye out for identity theft and fraud, but it can help you catch and dispute any reporting errors. Checking your annual credit report can save you from paying interest that you shouldn’t have been charged in the first place. Additionally, keeping a close eye on your credit can help prevent costly damage and lost time in the event of credit card fraud.
Good credit not only opens the door to further financial opportunities, but it’s necessary to live and live well in today’s society. Whether you’re applying for a new apartment, in the background process of your dream job, or looking to purchase a vehicle, credit is essential to getting you where you need to be. While there’s no one hard and fast rule when it comes to establishing good credit, there is a lot of recommended advice you can follow to make sure you are responsibly managing your credit and using it to your advantage.