How to build a strong credit history?
Establishing credit can be a bit of a catch-22. Lenders often require a credit history to approve credit applications, but it can be difficult to get approved for credit if you don’t have a credit history. Here are a few steps that can help you build a strong credit history:
Apply for a secured credit card
A secured credit card is a type of credit card that requires the cardholder to make a cash deposit as collateral to secure their credit line. The deposit is typically equal to the credit limit on the card. The purpose of a secured credit card is to help people establish or rebuild their credit history when they have a poor credit score or no credit history. Because the deposit reduces the risk for the lender, they are often more willing to approve individuals with no credit history.
Some well-known secured credit card websites include Discover’s Secured Credit Card and Capital One’s Secured Mastercard. Additionally, it’s recommended to check out credit card comparison sites like NerdWallet and CreditCards.com to find the best secured credit card for your individual needs.
For example, let’s say someone has a poor credit score due to missed payments or high credit utilization. They might have difficulty getting approved for a traditional credit card, but they could apply for a secured credit card instead. By making their payments on time and keeping their credit utilization low, they can gradually improve their credit score over time.
After building a good credit history with a secured credit card, they may be able to qualify for a traditional credit card with better terms and rewards.
Become an authorized user on a credit card
Become an authorized user on a credit card: If you have a friend or family member who trusts you and has a good credit history, ask them to add you as an authorized user to one of their credit cards. This will allow you to build a strong credit history based on their account history. Adding an authorized user to a credit card can have both pros and cons. Here are a few examples:
Pros:
Boost credit score: If the primary account holder has a good credit history, adding an authorized user with a poor or limited credit history can help boost their credit score by association.
Convenience: An authorized user can use the credit card for purchases, which can be helpful for shared expenses or for someone who doesn’t have their own credit card.
Rewards: If the primary account holder earns rewards for using the credit card, those rewards may also apply to purchases made by the authorized user.
Cons:
Liability: As an authorized user, you are not legally responsible for the debt, but the primary account holder is. However, if the authorized user uses the card irresponsibly or beyond their means, it could damage the primary account holder’s credit score.
Risk of overspending: If the authorized user has spending habits that are not in line with the primary account holder’s budget, it could lead to overspending and debt accumulation.
Trust issues: Adding an authorized user to a credit card requires a level of trust between the primary account holder and the authorized user, as the authorized user will have access to the credit card and the ability to make purchases.
Apply for a credit-builder loan
Apply for a credit-builder loan: Some financial institutions offer special loans for people who are trying to establish credit. A credit-builder loan is a type of loan that is designed to help people establish or improve their credit scores. It works by having the borrower take out a loan, which is then held in a savings account or certificate of deposit (CD) as collateral. The borrower makes regular payments on the loan, which are reported to the credit bureaus, helping to build a positive credit history.
Once the loan is paid off, the borrower receives the money that was held as collateral. The purpose of a credit-builder loan is to help people who have limited or poor credit history establish credit, as well as to help those with bad credit improve their scores. By making regular payments on the loan, borrowers can show that they are responsible with credit and improve their creditworthiness.
Credit-builder loans are typically offered by credit unions, community banks, and other financial institutions. They may have lower interest rates than traditional loans, but they may also have fees associated with them. It’s important to shop around and compare different options before taking out a credit-builder loan.
Renting an apartment
Renting an apartment: Many landlords now check credit scores when you apply to rent an apartment. If you pay your rent on time it will be reported to credit bureau and helps you establish credit.
Pay all your bills on time
Pay all your bills on time: Late payments can have a significant negative impact on your credit score, so it’s important to make sure you pay all your bills on time.
Here are a few more key points to consider in paying your bills on time:
Set up automatic payments: If you’re someone who tends to forget due dates, consider setting up automatic payments for your bills. This way, you can ensure that your bills are paid on time every month without having to remember to do it yourself.
Contact your creditors if you can’t make a payment: If you’re struggling to make a payment on time, it’s better to contact your creditors and explain the situation than to simply miss the payment. In some cases, they may be willing to work with you to come up with a payment plan or defer your payment to a later date.
Prioritize your bills: If you’re having trouble paying all your bills on time, prioritize the ones that are most important, such as your rent or mortgage payment. This can help you avoid late fees and other penalties that can hurt your credit score.
Monitor your credit report: Even if you’re diligent about paying your bills on time, mistakes can still happen. That’s why it’s important to monitor your credit report regularly to ensure that all your accounts are being reported accurately and that there are no errors or fraudulent activity.
Final Thoughts
By following these steps and being responsible with credit, you can build a strong credit history over time. It’s also important to check your credit score and report regularly to ensure that all the information is accurate and up-to-date and to address any potential errors or fraudulent activities on it.