Learn How to Build Credit

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Like it or not, your credit will determine what purchases you can make in life, whether it’s a house, a car or any type of loan.  However, starting from scratch feels like a Catch-22 conundrum: you need good credit to apply for a credit card, but you need a credit card to build good credit.  Yes, it’s frustrating, but we all start somewhere. Even those of us with stellar credit scores now began with little to no credit.

Never fear - there are several ways to build credit, and depending on where you’re in life, there are going to be some options that are better than others.

A Helping Hand

High school aged students, college students and young people will find that one of the best and quickest ways to establish credit is with the help of their parents.  Parents can sign their kids on as authorized users or co-signers on their own credit cards, all while still enjoying the rewards that come with their purchases.

Parents can still earn cash back, rewards and points by making their kids authorized users on their credit cards, but the catch is that some credit cards charge an annual or additional fee for authorized users. 

Parents will also still be responsible for any payments made by their kids on the authorized user credit card because it’s their name on the account, which is something to keep in mind before choosing this route.  Teaching teenagers money management with an authorized user credit card is a great way to learn how to build credit and how to be fiscally responsible.

Being a co-signer on a car loan, student loan or credit card will make you responsible for payments, even if your parents are co-signers along with you.  Having your parents co-sign can immensely increase your chances of qualifying if they have good, established credit.  However, if you’re under 21, stipulations will apply, and you’ll have to prove you make enough money for payments or have an adult co-sign with you.

Credit Cards for Beginners

Welcome to entry-level credit cards.  These are cards designed just for you, for people who have little to no credit to their name looking to build a solid credit history.

Start with a secured credit card. It’s a credit card that requires a cash deposit, which doubles as collateral in case you miss a payment.  Shop around and try to find a secured credit card with no annual fee, if possible, and one that reports to all three credit bureaus: Equifax, Experian, and TransUnion, for better oversight.  Capital One Secured Mastercard, for example, is a great beginner secured credit card.  It has no annual fee and allows you to build your credit when you make your responsible, on time payments.

Another option for a beginner’s credit card is signing up for a branded store card.  Why not shop at your favorite store and build credit?  It’s an all-around win-win.   Many store credit cards don’t require a long, outstanding history of credit, but you should be wary of potentially high interest rates you could get charged if you retain a balance.  A good place to start is with Amazon Prime Rewards Visa Signature Card.  Most of us shop on Amazon anyway, so enjoy the cash back, redeem your points on purchases and, most importantly, begin building your credit.

Building Credit Through Loans

For young adults, college graduates or for those of us who are just beginning to make our first big purchases in life, building credit can be done through loans. 

College graduates can begin building their credit by making on-time student loan payments.  For most graduates, student loans aren’t much of a choice, but it can be viewed as an opportunity to begin building positive credit.  As with any other credit card or loan, make sure you don’t miss a payment, or it will have adverse effects on your financial record.

Auto loans run in the similar vein, and even high school students can utilize this method in getting a head start on their credit while purchasing their first car.  Managing a car loan when you’re young is a great way to learn about money management while working towards establishing good credit for your future.

When you buy a house, a mortgage is similar in the sense that the money is being loaned to you from the bank, and you’re making monthly payments to pay it back, all while building equity and your credit.  Although most big-name banks will require good credit from their customers when seeking out a home loan, local or small-town banks may be different, giving credit beginners a chance at starting up.

Like a secured credit card, there’s also such a thing as a secured loan, too.  A secured loan is also called a credit-builder loan, and you can probably guess, it’s a good place to start if you want to begin building your credit.  Like a secured credit card, a deposit is made up front that serves as collateral.

How to Build Good Credit

You now have the means to build credit: a secured credit card, a store credit card, a co-signed loan, or you’ve become an authorized user under the guise of your parents’ account.  Now learn the ways to maintain and build good credit.

Building and establishing your credit is reliant on you being fiscally responsible.  One of the most important things you can do when you have a credit card is to avoid late payments by setting and scheduling auto payments to be made each month.  Late payments will linger on your credit reports, sometimes even for years, haunting your credit score and dragging it down.  Schedule an auto-drafted payment so you don’t miss one, even if it’s just for the minimum amount.

You don’t have to have a balance on your credit card to build credit, and in fact, it’s better to pay off the statement balance so you can avoid being charged interest.  Use your credit card for emergencies or for small, manageable purchases when you’re just starting out because it’ll allow you to get used to being responsible for paying it off. 

When you’re just beginning on your credit-building journey, it’s key to remind yourself to not go crazy with a new credit card once you’re signed up.  Getting ahead of yourself can be dangerous, especially when it comes to credit cards. 

Set financial goals for yourself as well as limits, like only using a certain percentage of your available credit line, setting aside part of your budget to pay off your statement balance to avoid interest, and always making sure you’re enrolled in minimum auto payments in case you forget to make one yourself. 

Building your credit up to a decent credit score is a long, arduous process that can take some people years to do.  Remember that everyone starts at the same place and don’t get discouraged.  In the credit score game, it’s unfortunately easier to damage your credit score than it’s to repair it, which is a hard lesson to learn, but if you strive to be fiscally responsible, you won’t have to.