Like it or not, credit scores are important in this day and age. Lenders use this number to determine loan rates, terms you qualify for, and a credit check is often run before an apartment is leased or a job is secured. It is hard to even get a loan if you do not have a credit history or high enough score. We know that everyone has to start somewhere. The key is to open lines of credit, pay them on time, and keep them open. That is why we have cobbled together some great tips so you can work on building a solid credit profile that gets you noticed for all the right reasons.
Apply for Credit Cards
The first step to building a credit profile is to have a credit card. If you are young or new to credit, you may start with a secured credit card, which starts with a cash deposit made upfront by you and is usually the same amount as the cards available credit limit. As you buy things and pay the payment on time, the company reports this information, which builds your credit history and ultimately your credit score. Over time, you can then open other credit cards with better rates and terms. However, you should leave this first card open. The longer a credit account is on your record, the better off you are.
Loans for Credit Building
There are credit building loans offered by banks and credit unions. The goal is to help people develop a credit history and build their score. When you borrow the money, it is held by the lender and not released until you pay the agreed upon amount. These payments are reported positively to the three major credit bureaus. Credit builder loans are a low risk way to build your profile.
Co-Signers and Authorized User Access
Another viable ways to build a credit profile is to get a loan or credit account with a co-signer. Whoever takes on this responsibility knows they will owe the amount if you do not pay. Investing in a small loan and being transparent with loved ones means that you can get the help you need.
Become an Authorized User on a Credit Card
Another way to enhance your credit history is to become an authorized user on someone else’s credit card. For example, some family or friends might add you as an authorized user on one of their cards. This adds another line on a credit report and boots your score. All the credit history on this card will now show up on your credit bureau. This is really a great option if you have a friend of family member who trusts you and who you trust to do this for you.
Take It Slow and Pay Attention
Try not to rush into credit building. A common mistake people make is opening too many credit cards, overspending, or not paying attention to what they owe. Even one late payment will negatively affect your profile. That said, beware of opening too many accounts. There is no need to go into debt to enhance your credit history. Just keep in mind that you do not want to overspend. Put a few bills on a credit card or invest in a small loan, and you will be in good shape! Once you have a line of credit open for a few months, start checking your credit report. You can request a free one from each of the bureaus once every 12 months. Credit Karma is also a great free option. Just open up an account with them and you’ll be able to get a fairly accurate score each and every month. Their scores are not exact. Typically banks and other credit lenders can pull different forms of credit bureaus and at different times.
Its not a race
The key to building a strong credit profile is to open a few lines of credit and be responsible. Lenders want to work with people who have a history of reliability. Thus, you should make sure you pay the minimum payment on time every month. It helps if you can pay the full balance too. With consistent payments and a few open accounts, your score will shoot up. Many people have problems with credit because they live over their means and cannot payback what debt you have accumulated. Small credit limits are a great thing when your starting out. Typically card issuer’s start out with $300 credit lines. This is great because when you put $50 on it, just take a couple months of $25 payments and pay it off. Rinse and repeat. Interest on a small dollar limit typically runs a couple dollars. So when you make your minimum payment of $25, just about all of it is going to principle. Where people get into trouble is when you have a $2500 limit and you put $2,000 on the card. Now you have to pay back the debt. You minimum payment is $75/mo.. Now you have to send in more than that otherwise your not paying down anything! All your paying is the interest. This principle goes with any type of lending. You always want to be in a position to pay more than the debt payment you have. Getting rid of debt with on-time payments = perfect credit.