Having a good credit score will prove to be beneficial many times in life as it opens up the door to a world of opportunities, not to mention lower interest rates. But you’re not just born with a high credit score. You have to build it.
But how do you build credit?
Building credit isn’t nearly as complicated as you may think. For example, you start to build credit as soon as you open a credit card in your own name and start making purchases. Opening up a credit card is one way to build credit, but there are a couple of other ways, which we’ll be discussing in this chapter.
So far in our credit building series, we’ve discussed some of the basics of credit, like why you need a credit score, the ranges of credit scores, what the average credit score is, the factors that impact your credit score, and more. If you need a refresher before moving on in the series, you should go back and read through the previous chapters.
In this chapter, we’ll be going over how to build credit. Continue reading to learn more about the importance of building credit at a young age and how to start building credit from scratch.You can also use the links below to go straight to a specific section.
Why It’s Important to Start Building Credit Now
Your credit score is used for many things. Your credit score is used to buy a car, to qualify to rent an apartment, and even to land a job. These are all things you need as a young adult, which is why it’s so important to start building credit at 18.
The sooner you start to build credit, the easier your personal and professional life will be. For example, if you wait until you graduate to start building credit, getting approved for an apartment is going to be a lot more difficult than if you started building credit when you were 18.
Starting to build credit young also establishes a long credit history, which is very important to have. A long credit history proves to lenders that you’re responsible and able to pay off debts in a timely manner.
Often, lenders are hesitant to give money to someone who just started building credit a couple months ago. They want to lend to someone who has a long history of creditworthiness. And the earlier you start building credit, the longer your credit history will be.
What to Consider When Trying to Build Your Credit
There are a couple of factors that you have to keep in mind when you’re trying to build credit. And if your first credit score is lower than you anticipated, that’s perfectly normal. You’re just getting started with credit, afterall! You just need to develop good credit building habits and you’ll have a high credit score in no time.
Here are some key considerations that you’ll have to keep in mind when trying to build credit:
- Are you starting from scratch?
Starting to build credit from scratch may seem daunting, but remember– we’ve all been there. No one just comes into this world with a perfect credit score. You need to work towards it. Fortunately, there are many ways you can go about increasing your credit score, like opening up multiple credit accounts and keeping your debt to credit ratio low. So just remember, even if you start at a low number, that doesn’t mean you’re stuck there.
- Will you be using a credit card?
Getting a credit card is the most common way to start building credit, but you have a couple of options when it comes to the type of credit card. If you’re planning on using a credit card to build credit, make sure you do some research about which type is best for you. For example, a secured vs. unsecured credit card.
- Do you have someone you trust to help you?
Having someone you trust to help you along your credit building journey is definitely helpful. Not only can they give you guidance and advice, but also they may let you become an authorized user on their credit card account, which can help you start building credit early on.
- Are you financially responsible?
Being financially responsible is extremely important when it comes to building credit. Your payment history has the biggest impact on your credit score, so you need to make sure that you’re on top of your bills at all times and never miss a payment. A good credit score is a direct reflection of your financial responsibility.
- What are your financial goals?
Another important factor to consider when building credit are your financial goals. Is your goal to rent an apartment? Buy a house? Get a loan to start your own business? Regardless of what your goals are–you need a high credit score to achieve them.
How to Build Credit from Scratch
You have a couple of options when it comes to building credit from scratch. You can:
- Open a credit card
- Become an authorized user
- Build credit with a loan
Building credit from scratch takes time, so you need to be patient and remember that your credit score isn’t just going to skyrocket overnight.
But as you build your credit, it’s crucial that you continue to monitor your score and stay on top of your finances. There are various side effects of bad credit that you want to avoid. Monitoring your credit is also important so that you can quickly catch any errors or potential fraud.
Mistakes on credit reports are common, and they can reflect negatively on your credit even if they’re not true, so you need to dispute credit report errors as soon as you see them. You can easily get a credit report for free so you can stay on top of your credit history and ensure you’re in good shape.
Does checking your credit score lower it, you ask? No, as long as you’re just checking your score online and not checking it to apply for a new line of credit.
How to Build Your Credit with a Credit Card
So now that you know how to build a credit score from scratch, let’s go over how to build up credit with a credit card.
Using a credit card is one of the most common ways to build credit. To build credit with a credit card, you need to open a credit card in your name. But there are a couple of different types of credit cards you can choose from, such as:
- Secured credit cards: These types of credit cards are designed specifically for people who are starting to build their credit. To open a secured credit card, you just need to submit a security deposit to the issuer.
- Student credit cards: Student credit cards are made for college students. Typically, they’ll offer benefits like cell phone protection and others that are relevant for college students.
- Retail credit cards: Retail credit cards come from a department store. They’re usually easier to qualify for because the credit limits are low and they have high interest rates.
How to Build Your Credit without Using a Credit Card
If you don’t want to build your credit with a credit card, no problem, you have two options for how to build your credit without using a credit card. You can either become an authorized user, or you can build credit with a loan.
Becoming an Authorized User
Becoming an authorized user on a parent’s credit card (assuming they have good credit) is a great way to start building credit at a young age. When you’re an authorized user, you can receive a credit card in your name that’s associated with the account. So as soon as you start to use that credit card, you’ll start to build credit.
Building Credit with a Loan
The other option is to start building credit with a loan. This includes student loans, auto loans, secured loans, and credit-builder loans. Credit companies love to see that you have a combination of loans on your account and that you’re staying on top of paying them, so taking out loans can be a great way to build your credit. You just have to make sure to pay them on time.
Key Takeaways: How to Build Up Your Credit
- The sooner you start to build credit, the easier your personal and professional life will be.
- You have a couple of options when it comes to building credit from scratch. You can open a credit card, become an authorized user, or build credit with a loan.
- There are a couple of different types of credit cards you can choose from to build your credit with.
- Being financially responsible is extremely important when it comes to building credit.
- Another important factor to consider when building credit are your financial goals.
Improve Your Financial Health By Building Up Your Credit Score
Knowing how to build credit is the first step in improving your financial health and achieving your dream credit score. Building up good credit takes time, but with enough patience, dedication, and good habits, you can get that ideal score quicker than you thought possible.
The next chapter in our credit building series is Chapter 8, and we’ll be discussing how to increase your current credit score. Continue reading to find out more.