Learning how to build your credit can get overwhelming.
Whether you are looking to buy a home, get a personal loan, or open a credit card, it is hard without a good credit history.
Luckily, the ten steps below can help you build your credit even if it’s currently poor or nonexistent.
1. Get a Secured Credit Card
If you’re starting from zero, or trying to repair bad credit, you’ll probably need to apply for a secured credit card first. “Secured” means that you provide a deposit upfront. Your credit will be the same amount as this deposit.
You can use this card the same way as other credit cards. However, make sure to make your payments on time and don’t incur interest. Otherwise, your deposit will be used as collateral (not to mention it will defeat the purpose of a secured card, which is to build your credit).
Only put things on your secured card that you know you can pay back on time. The goal of a secured credit is to eventually qualify for an unsecured card that doesn’t require a deposit.
When choosing your card, make sure it reports to the three major credit bureaus (Experian, Equifax, and TransUnion). Also, look for a card issuer who offers a low annual fee.
2. Look at a Secured or Credit Builder Loan
A secured loan uses a deposit or the money you have in your account as collateral. This is a great way to build credit. You can even earn interest on your deposit, which helps to offset the interest rate you’re paying to take out the loan.
Secondly, you can apply for a credit builder loan. As its name suggest, it exists solely to help people like you build their credit over time.
Typically, with a credit builder loan, you will “borrow” money from a lender. The lender then holds this money in an account that you can’t touch until you pay back the loan. Then, the lender reports your payments to the credit bureaus to boost your credit. You can often find these loan types at community banks and credit unions. There are also online lenders that offer these.
3. Get Someone to Co-Sign for You
Having a co-signer is another way to get an unsecured credit card or a loan. By having a co-signer, you might have access to larger loans or credit limits from lenders that could potentially build your credit faster if you pay everything on time. However, keep in mind that this route could also incur greater risk if you take on more debt than you are prepared to handle.
4. Being an Authorized User on Another Person’s Credit Card
If your significant other or family member adds you as an authorized user to their card, you can build credit history by using it. Plus, you won’t be obligated to pay for charges.
However, check with the card issuer to ensure that they do in fact report authorized user activity to the major credit bureaus, just in case.
5. How to Build Your Credit by Paying Rent
Wouldn’t it be great to improve your credit score with the rent you’re already paying anyway?
Certain services, like Rental Kharma, actually put your rent payments on your credit report. This can help you build up a history of timely payments.
However, keep in mind that not all credit score will take your rent payments into account. Still, some will, and that could be the credit boost that finally qualifies you for a credit card or loan that helps you establish your positive credit history for every lender out there.
6. Make All Payments on Time
Don’t just make your credit card or loan payments on time. You also need to pay your utility bills and other such bills that get reported to credit agencies and collection agencies.
7. Maintain low Credit Utilization
Your balance (the amount you owe) should be as low as possible when compared to your credit limit.
Always seek to pay off the full balance each month, but if you absolutely must carry over some balance, keep it under 30% of your total credit limit.
8. Don’t Open a Ton of Accounts Simultaneously
One of the factors that determines your credit is your average account age. A lot of new accounts will lower this average quite significantly, which reduces your credit score.
9. Keep Your Accounts Open Longer
Not only does having older accounts help by boosting the average account age, but it also helps extend your payment history and decrease your credit utilization. Of course, if the account has an annual fee, you may want to reconsider.
10. Stay on Top of Your Credit Reports
You’ll want to make sure your actions are paying off the way they should be. Check your credit reports and credit scores at least annually for any discrepancies that might be hurting your score.
You can check your credit score for free on several websites today, such as CreditKarma.
You are also entitled by federal law to one free credit report every year, which you can access at AnnualCreditReport.com
Also, some lenders will give you more frequent FICO updates for free, so be sure to ask them if they do.
Putting it All Together
Now that you understand how to build your credit, you’re ready to spring into action.
But make sure to maintain good supporting habits such as finding ways to increase your income, limiting your spending, and tracking your finances to the penny.
That way, over the next several months and years, your credit will begin to soar and you can achieve your financial goals.