Bank loan concept with businesswoman crossing her fingers on blackboard background with credit score scale.

How to Start Building Credit this year.

There are many myths about credit, but building credit for a home or car purchase is necessary without having cash on hand for those purchases.

Bank loan concept with businesswoman crossing her fingers on blackboard background with credit score scale.

A good credit score is key to your financial health. When you have a good score, you can more effectively prove to lenders and other institutions that you can handle money well. This is a great way to get better interest rates on loans, like your mortgage or your car. Without a credit score, it can be difficult to get financing for major purchases. 

What is a Credit Score?

Your credit score is an indication of your ability to handle debt and repay it responsibly. There are three major credit bureaus that monitor your credit usage, and then give you a score based on your history. Your score can change depending on factors such as:

All of these factors can show future lenders how well you can manage debt. Your score can range from 300-850, with 850 being the best credit score. You don’t have to have a perfect 850 score to get more opportunities, however, it is wise to try boosting your score above 670 to start seeing positive results. 

How to Start Building Credit

If you’re starting from ground zero to build your credit, it can seem like an “impossible climb.” After all, you generally have to have a good credit score to open a new line of credit, but you have to have some history with credit to have a good score. Fortunately, there are a few ways to get some credit history under your belt if you don’t already.

Become an Authorized User

If you’re unable to open your own credit line, becoming an authorized user on someone else’s account can help. For example, a parent can add you as an authorized user on their credit card. Doing so gives you access to their credit line, with your own card, so you can benefit from that person’s responsible use as well. 

If you become an authorized user on someone’s account, be sure to choose someone who has a good credit score or manages their credit well. This is important because the reverse is also true—if the person you share an account with doesn’t manage things well your score can also decrease. Your spending habits can also negatively affect the original account owner’s credit, as well.

Ultimately, this strategy takes a lot of trust and communication. Everyone involved should be responsible for managing the credit well, for the best results.

Open a Secured Credit Card

If you prefer to have your own credit card, you may find that it’s hard to qualify. However, it’s not impossible either. There are a few types of credit cards that cater to “new” users, secured cards. These cards are designed to help people build credit. 

To open a secured credit card, you must put down a deposit of cash to “secure” your credit line. So, if you pay $200, you have a $200 credit line to use on your credit card. The money you pay is collateral, so that company doesn’t lose money if you default on your debt. This makes it safe for companies to take a risk on people with no credit. 

If you have a low credit limit, just be sure to keep your balance paid down. Credit bureaus like to see that you aren’t using every bit of credit you have. You may also be able to apply easily for non-secured cards, such as a student credit card or store-affiliated cards. These can sometimes have high-interest rates, so be careful.

Get a Co-Signer

Another great way to start building credit is through loans, but loans can also be tricky to get without credit history. Having a co-signer can open up your access to new options. For example, if you plan on buying a car in 2022, having someone co-sign on your loan can boost your chance of approval. It can also improve your financing options. 

Once you have the loan, you or your co-signer can make payments. So long as you pay on time and reduce your balance, you can get a good credit boost over time. This strategy may take a bit longer but can be a solid way of building credit without a line of credit. 

Build Better Credit now.

A good credit score is essential in this day and age; even if you don’t think you need it now, you can benefit from building your score. It can take time to build, so you’ll want to get a head start. All sorts of financing options can open up to you this way. As you build your credit, just remember that paying down your balances, making on-time payments, and not opening too many accounts at once will help you immensely. Here’s to better credit!

If you are interested in this topic click here to learn more about how to build credit with credit cards.

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