How to Establish Credit
Credit is a commodity in the U.S. Everyone wants it, but not everyone has it. How well you manage your credit will determine whether lenders or credit card companies are willing to provide you with the financial resources you need. But for young people,
or others with limited financial history, it can be difficult to know how to establish credit. The good news is that there are a variety of financial tools to help you build your credit from the ground up.
Credit cards to build credit
If you are building your credit from scratch, a credit card is a good place to start. Credit cards can be effective building blocks, but only if used and managed properly. Your lack of credit history means you may only qualify for a card with a low spending limit. Making small charges and paying them off each month can help bolster your credit profile by establishing a history of responsible credit use and consistent payments.
It is important to understand that there are different types of credit cards. Secured credit cards are offered specifically for people building or rebuilding their credit. Credit card companies offer these and require a refundable security deposit. There are also credit companies that offer student credit cards for eligible students, with no security deposit required.
Another method is to become an authorized user on someone else’s credit card. If you are having difficulty getting approved for a credit card on your own, consider asking a family member to have you added as an authorized user on one of their credit cards. You will want to check with the issuer and ask if it reports authorized users to the credit bureaus, which would allow you to start building a credit history under your name. There is a shared risk in becoming an authorized user, as the primary cardholder’s ability to make their payments could also affect your credit.
How to build credit without a credit card
You don’t have to have a card to build credit. There are many avenues available to you, and it is worth at least exploring each of them. Having a diverse mix of types of credit can help your credit score. Just give each option careful consideration and avoid taking on more than you can manage.
Apply for a loan
If you are going to college and plan to take out student loans or personal loans, you are well on your way to building credit. Federal student loans do not require a credit check, allowing students with no credit to get approved by a lender. Your students loans will be reported to the credit bureaus and that will help you start to build a credit history.
It may also be worth checking with a community bank or credit unions to see if they offer credit-builder loans. True to their name, credit-builder loans are for the explicit purpose of helping a person build their credit. The amount you borrow is held in an account and released to you once the loan has been repaid.
Establish a stable source of income
Not only is it important to practice good credit habits, such as keeping your credit utilization low and making your payments on time, but it is also critical to create a sense of stability. Lenders look for a stable source of income, a consistent work history and an established place of residence. Stability can go a long way towards improving your credit or loan application.
Rental payments and utility bills are not typically factored into your credit, but there are credit reporting companies that have begun to collect positive rental payment information. Consider reaching out to your landlord about reporting your rental payment history to credit bureaus.
Open checking and savings accounts
It may not directly impact your credit history, but consider opening a personal checking account or savings account. When reviewing a credit application, lenders will typically ask for your bank account numbers. If you have already established a banking relationship and are in good standing, that will signal to lenders that you have demonstrated responsible money management.
Building credit is a process
Remember, you are not going to be able to build your credit overnight. It takes time, especially when you are starting from scratch. By simply applying for a credit card or loan, you can start building the foundation for a more secure financial future for yourself.
Please contact us if you have any questions about how we can help you build your credit.