If you haven’t already done so, it won’t take long until you encounter a life situation where someone asks you to check your credit. There are many myths about credit, but it is important to build a credit card for the purchase of a home or car without having to pay cash for those purchases. From buying a new cell phone to getting a mortgage, credit reports and scores are used by businesses to gauge your creditworthiness and establish loan terms.
Credit scores are based on how you have managed debt in the past, and lenders use your score to establish the level of risk you face as a borrower. If you have a long history of making timely payments and managing debt responsibly, you have a good chance of getting a credit score and you may have a better chance of getting approved for credit with favorable terms.
If you do not have much experience with credit or have negative information such as late payments in your credit history, you may have difficulty approving a new account. And if you get approved, chances are you’ll get less favorable terms.
Building credit can be difficult. If you do not have a credit history, it is difficult to get a loan, credit card, or even an apartment.
But how do you show a responsible payment date if someone doesn’t give you credit in the first place?
Several tools can help you establish a credit history:
- 👉 If your goal is to get a credit card, you can start with a secure credit card or a co-signed card, or ask to become an authorized user on someone else’s card.
- 👉 If you want to create credit without a credit card, you can try a credit builder loan, secured loan, or co-signed loan. There are also ways to use rent, phone, and utility payments to generate credit. Some of these methods are free, others have a fee.
We will tell you two ways for building credit.
- 👉 Build Credit With a Credit Card
- 👉 Build Credit Without a Credit Card
How to Build Credit with a Credit Card?
👉 Open your credit card account first:
The card you apply for should be based on whether you have a credit history. Fair credit, bad credit, good credit, and for those who don’t have credit. If you have at least some credit history, you may want to consider applying for an initial card (such as a store card) that is easy to get approved.
If you do not have a credit history, you may need to apply for a secure credit card to be approved. Once you have your first card, use it for everyday small purchases that you can easily afford. Pay off your balance every month to start making payments on time, showing lenders that you are a responsible borrower.
👉 Get a secure credit card:
If you do not have any credit or bad credit, your credit card options may be limited. However, you may still be eligible for a secure credit card. This type of card works like a traditional credit card, except that it requires you to pay a security deposit in advance, which the issuer guarantees against your expenses. If you stop paying and default on the account, the issuer keeps a deposit to cover the debt. This protects credit card issuers financially and means they can accept people with low credit history. Once you have a secure card, use it to pay for everyday small items and pay your bills on time and in full each month. This will extend your payment history over time, which can help build your credit score.
👉 Become authorize user:
For people who are having difficulty qualifying for a credit card, becoming an authorized customer can be a helpful solution. As an authorized user, you will be added to an existing account and given your own card to use. The positive account payment date is then added to your credit report and factored into your credit scores. However, since you are not responsible for account management and payments, it is limited to the extent that it can contribute to your reputation.
👉 Request an increase in the credit limit:
If you already have a credit card, there are ways you can be sure that you are getting the most out of it. First of all, use it and pay your bill in full and on time every month. Then, after holding the card for several months, consider requesting an increase in the credit limit. Doing so can help improve your credit utilization ratio, which is the ratio of your balance to your credit limits.
Using your credit is an important credit scoring factor, and keeping your balance below 30% of your credit limit can help your score. And while 30% is a great starting point, the lower your credit usage, the better for your score. Lenders cannot accept applications for large outstanding balance accounts, so it is best to repay as much of your debt as possible before applying for a limit increase or applying for new credit. If you approve of the limit increase, resist the urge to increase your credit card costs.
How to Build Credit without a Credit Card?
While credit cards are a great tool for generating credit, they are not your only option. Because your credit score reflects how well you have managed debt in the past, any accounts you have that are reported to the credit bureau in good condition are the ways to help increase scores.
Even if you are just starting and do not yet have any credit accounts, there are other ways you can build your score over time. Here are four strategies for creating credit without a credit card:
👉 Pay off all your current debts diligently
The date of repayment is the most important aspect of your credit score, so pay close attention to your current debt. To maintain a good payment date, make sure that all your payments are completed and submitted on time. Another factor in your score is the progress you have made in repaying your debts. Getting a loan balance close to zero tells lenders that you are able to pay off your debts.
👉 Installment loans can boost your score
If you do not have a long credit history, an installment loan, which you repay with a set of monthly payments, can help you build your score. Auto, mortgage, personal and student loans are all types of installment credit. This means that the additional benefit you can get from buying a car or taking out a loan to pay for your education is to help you build credit, assuming you make all your payments on time. You should not only take traditional loans to make your credit but there are credit-making loans that work in different ways and are for the same purpose.
👉 Nonprofit lending circles
The lending circle is an organized group of peers who lend to each other. Through this process, communities help each other build credit. The Mission Asset Fund is an example of a popular nonprofit that facilitates this type of borrowing and credit creation.
Practice good credit habits.
Creating a good credit score takes time and payments on time.
To get a FICO score, you need at least one account that has been open for six months or more and at least one lender has reported your activity to the credit bureau in the last six months. A VantageScore can be developed faster than FICO’s biggest competitor.
Follow these good credit habits to build your score:
- 👉 Try to make your payments on time and pay as little as possible. Credit card or debit repayment on time, every time, is the most important thing you can do to help build your score. If you can pay the minimum, it is also helpful for your score.
- 👉 If you use credit cards, keep your credit usage low – usage is the percentage of your credit limit you use. We recommend that you keep your credit usage to less than 30% on all cards whenever possible. The less you use, the better your score.
- 👉 Avoid applying for multiple credit accounts close to each other. Applying for credit can cause a slight, temporary decrease in your score. Multiple applications can cause significant damage.
- 👉 Keep credit card accounts open. Unless you have a compelling reason to close the account, such as a higher annual fee or poor customer service, consider keeping it open. You can also find out how to reduce it or move your credit limit to another card. Closing an account can damage your credit usage and reduce the average age of your account.
Check your credit score and reports:
A credit report is a record of how you have used credit in the past. Your credit score predicts how you will handle credit in the future. There are a lot of wallets available that you can use and monitor your credit score and get a report of it.