Establishing credit for the future

Establishing credit for the future

If you have ever applied for a home loan or auto loan, you understand the importance of having a good credit score. Many landlords require you to have a good credit score to rent an apartment. Some people reach their middle ages without acquiring student loans, car loans or using a credit card. Some of them make all their payments in cash, and it can work for them. However, when they grow older and look forward to buying their first home, they will lag several years behind those who already have a good credit history by paying back loans or credit cards, according to this article. Know that credit history is taken into account for deciding the insurance premiums, acceptance for your rental applications or employment screening. Building a good credit card score is possible within a year or two. Here is how you can go about establishing credit.  

How to get started

Establishing credit is a tough job that needs a hard toil to build. Not having a good credit history will make it difficult for you to get a loan, buy an apartment or get a credit card. Nevertheless, the question remains. How can you show a responsible repayment history if you can’t get the credit to start with?

Many things can help establish a good credit history like a credit builder loan, secured credit card, a loan or credit card co-signed by you or an authorized user status on someone else’s credit card, says NerdWallet. Irrespective of the route you choose to establish credit, you must ensure you use it correctly and smartly to win you a good credit score.

Get a secured credit card

While trying to build your credit score from scratch, it is advisable to start with a secured credit card. The system works like this. A secured credit card works by leveraging on an upfront cash deposit you make. The credit limit, in this case, is decided by the deposit amount. You can use a secured credit card in the same way you will use a regular credit card for all purchases or payments. In case of any payment defaults from your side, your cash deposit serves as the collateral. Your deposit gets refunded when you choose to close the account. At the same time, remember that secured credit cards are not something you can use always. Their prime objective is only to get qualified for a standard card without a security deposit. It is advisable to go for a secured credit card that charges a minimal annual fee and will report your credit history to all the three credit bureaus namely Equifax, Experian, and TransUnion.

Get a credit builder loan

The only objective of a credit builder loan is to help people establish credit. In this case, the lender holds the mount you deposit and will not release it till you repay the loan. Your payments are reported to the credit bureaus. The most common sources to get a credit builder loan are community banks or credit unions.

Find a co-signer to get a loan

While applying for a loan without a credit history, it is possible to get it by finding a co-signer. Nevertheless, you must make the co-signer understand in the very beginning that the co-signer will be on hooks for the outstanding amount you might fail to pay.

Get authorized to use someone else’s credit card

In this way, a family member or a friend might come forward to add you as an authorized user on their credit card. When you are authorized as a user, you can gain access to a credit card and also be able to build your credit history. Nevertheless, you are not legally bound to pay for the charges the credit card incurs. This system can work only if the card issuing authority can report your authorized user activity to credit bureaus.

Earn credits on your rental payments

Agencies like Rental Kharma and RentTrack are rent reporting services that consider a bill that you are paying now and put it on your credit report. This can help build a positive payback history. Though not all types of credit scores will take such payments into account, some do. This can be good enough at times to get a loan or credit card that can help establish your encouraging credit history for any lender.

Good practices that will help establish credit

Though building a good credit takes a lot of time like six months of timely repayments in the least, the following methods can help create a good credit score and show that you are worthy of getting credit.

  • Make all of your payments on time. This applies not only to the credit accounts but also to other accounts like utility bills. Unpaid bills can be sold to collection agencies which can hurt your credit badly.
  • Utilize your credit to the minimum. Though it is good to pay in full every month, ensure the balance you might have does not exceed 30% of your credit limit anytime.
  • Do not open many accounts at once as new accounts can reduce your average account age that can contribute to your credit score.
  • Keep operating the accounts as long as it is possible for you unless any unused card carries an annual fee. Accounts managed for long can be useful to establish a high credit utilization and repayment history.
  • Check each of your credit reports at least once a year for any discrepancies and errors.