7 Clever Tips for Building Credit
Starting out with a clean slate when it comes to your credit history isn’t such a bad thing - It means you have room to grow!
And yet, just getting started can be frustrating because it's ground zero.
If you're interested in building up your credit score, consider the following to prove your trustworthiness, and hopefully start climbing your way toward the top.
The Waiting Game
There are two major algorithms that generate your credit score: FICO and VantageScore.
To get a FICO score, you'll need to have an account open for at least six months.
During that time, your creditor must be actively updating and reporting your status for the account to qualify.
VantageScore has their own timeline, which is typically less than six months.
Every lender has their own preference when it comes to choosing between FICO and VantageScore, so you may still want to plan for six months as a baseline for getting a credit score.
Luckily, you have several options to choose from when it comes to opening an account, even if you've never borrowed anything in your life.
A credit-building loan is usually granted by a credit union or bank (and sometimes even online.)
A person with no credit history will technically be 'approved' for a loan, but they won't actually get the money until they've paid off the debt first.
It's an unusual system, but the advantage of this plan is that all payments are reported to the credit bureaus.
Plus, once it's repaid, you'll get all of the money back.
Secured Credit Cards
A secured credit card can be likened to a credit-building loan in reverse.
You give a credit card company a cash deposit, and they give you a line of credit. Usually, the two amounts are the same.
So if you give the company $500, they'll give you a line of credit for $500.
You then make payments just as you would a regular credit card, and accrue interest as if you were a regular user.
Should you fail to make payments, the credit card company will use your deposit as collateral to take care of the additional charges.
Ask for a Co-Sign
A co-signer can be used to obtain an unsecured credit card for a person with no credit history.
Usually, it's a family member or spouse who's a co-signer, but it can be a friend or other relation.
The limits are usually based on the co-signer's credit history, so the credit limits can be substantial if you choose this route.
Just remember that your co-signer’s credit score can be affected by your actions, plus they’ll be on the hook for any debt you default on, so it’s essential that you use it responsibly.
Add Your Name to a Credit Card
Your spouse, significant other, or family member may be able to add your name to their credit card.
As an authorized user, you're not technically liable to pay for the charges as an authorized user on someone else's account, but the primary account holder may still expect you to cover your portion of the bill.
Even if you’re not using the credit card, simply adding yourself as an authorized user on another person’s active credit card may help to build credit history under your name.
However, not all credit card companies will report an authorized user to the three major credit bureaus, so confirm with the card issuer before going this route.
If you pay your rent on time, every time, you may be able to use this to your advantage.
Check out Rental Kharma as a way to turn those timely payments into a solid credit report.
Certain credit score companies won't accept rental checks as acceptable credit history, so again, you may have to do some additional research to decide if this could work for you.
Establish Better Habits
There are certain things that you can do that have more impact on your credit score than others.
Paying bills on time, including student loans, utility bills, and credit cards, is just the beginning.
You'll also want to use as little credit as possible, ideally around 30% or below.
So if you have $1,000 credit card limit, make sure that your outstanding balance is never more than $333 at a time.
In addition, limit the number of open accounts you have at any given time, but keep the open accounts going for as long as possible.
Ideally, you'd have two or three open accounts that are active for several years or more.
Part of building up your credit means keeping track of your score.
The more regularly you monitor your score, the more likely you are to catch any problems before they turn into catastrophes.