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How to Build Credit

Your credit report is a huge factor when it comes to meeting your financial goals. Whether you want to get a high-earning rewards credit card or buy a home, you’ll need at least a good credit score. But you don’t start with a perfect credit score. You have to earn it by slowly building your credit file. If you don’t have any credit yet, don’t worry. Everyone has to start somewhere, so read on to learn how to build credit.

Check out the best credit cards for bad credit

Get a Secured or Retail Credit Card

Let’s take a look at a couple ways to build credit with a credit card. One way is to start using a secured credit card. Secured credit cards require a security deposit of a few hundred dollars. This deposit serves as collateral should you miss any payments. It also typically sets the amount of credit you are allowed to use. Secured credit cards provide a sense of discipline when spending on credit. Plus, once you’ve built some credit and solid spending habits, you can upgrade to an unsecured card and receive your security deposit back.

Secured credit cards are a good way to rebuild your credit. However, if you’re starting from scratch, a secured credit card “might not be necessarily the best choice for your first credit card,” Jason Steele, a journalist and credit card expert, said in a phone interview with SmartAsset. “Without any negative information on your credit report, you’re a blank slate.”

In this case, Steele recommends finding a credit card for fair or average credit scores instead. That way, you don’t have to put down a security deposit if you don’t need to. If you’re a student, you can find a student credit card, which usually offer financial education and resources.

If you’re not completely ready to use a secured credit card, retail credit cards offer another credit-building option. You’ve probably already been asked at some point whether you’d like to open a store account to snag 20% off at checkout. Maybe you’ve almost always said “no.” Turns out those cards could help you build credit. For starters, retail cards are usually easy to qualify for. And although they tend to lack “competitive interest rates or features, there’s usually no annual fee, making them a great first credit card,” Steele says.

Become an Authorized User

If you can’t qualify for a secured or retail credit card or don’t quite trust yourself with your own credit card, don’t worry. You don’t have to go about building credit all by yourself! You do have the option of asking a family member or close friend about becoming an authorized user on their card. Becoming an authorized user means that you get to use the credit card almost as though it was your own. You get to spend on it, and you get to repay what you’ve spent.

It’s important to remember that as an authorized user, you and the primary cardholder share responsibility. However, legally, the primary cardholder is held responsible for any unpaid bills or bad credit behavior. The credit line you share will affect both your credit history and theirs. This makes it important to trust the primary cardholder and be a trustworthy user.

Before you become an authorized user, you should make sure that the credit card issuer reports to the credit bureaus. This practice ensures that your good (and bad) credit behavior will be reflected on your credit report.

Enlist a Co-Signer

How to Build Credit

Having someone on your side with good credit help you access products you normally couldn’t. If you feel comfortable asking someone with a strong score, they can co-sign a loan or credit card for you. Of course, the other person will have to be comfortable with co-signing as well.

Co-signing means the other person takes full responsibility for the debt in case you can’t make payments. Not all credit card issuers or lenders allow co-signing so you may have to call the institution beforehand to make sure. Like with becoming an authorized user, your behavior will affect not only your own credit, but your co-signer’s as well. If you fail to make payments, they get stuck with the bill. Be sure you can handle the account responsibly before you choose this option.

Apply for a Credit-Builder Loan

Did you know there are loans that exist to help you build your credit? That’s exactly what a credit-builder loan is. A financial institution like a bank or credit union will set aside an amount of money that you’re “borrowing” into a savings account. You then make monthly payments to repay that loan. Once you’ve paid off the entire amount, you gain access to the loan amount plus any interest that accrued.

Credit-builder loan amounts are usually small (less than $1,000) and terms usually range from six to 18 months. These loans are technically an extension of credit and thus reported to the credit bureaus. This means that when you make on-time payments, the bureaus will see your responsible credit habits and reflect that in your credit report.

Other Ways to Build Credit

You may be contributing to your credit score right now even if you don’t know it. For example, if you’re paying off your student loans, that counts toward your credit score. As long as you’re making your payments on time, this reflects pretty well. If you’re paying rent, you can get your payments reported to the credit bureaus through a rent-reporting service. This adds a different kind of credit to your credit report, as well as history of credit, each of which will boost your score. The same can go for utility bills. You just have to make sure you’re always paying on time, or else you end up hurting your credit.

Practice the Right Habits

How to Build Credit

No matter which methods of credit-building you use, your history of credit use defines your credit score. You always want to use your lines of credit properly, whether credit cards or loans. Be sure you understand the fees, interest rates and other details of any loan or card before signing up.

It’s important to note that any account you open will need to stay open for six months in order to build credit. However, avoid opening too many new accounts all at once. While this might seem like a viable way to build credit, each application triggers a hard inquiry into your credit which causes a slight drop each time. Plus, too many hard inquiries can be viewed as a sign of risk. You’ll want to show a mix of credit accounts over time, ranging from credit cards to various loans. This proves you can manage all kinds of credit.

Above all, you should work on always making payments in full and on time. This way, you don’t carry a balance and end up owing more and more in interest. This can leave you with a rotten credit score and some big debts. If you can’t help but carry a balance, don’t let it exceed 30% of your credit limit. This keeps your credit utilization low which is an important metric for your credit score.

Essentially, follow Jason Steele’s advice. “Pay your bills on time and carry very little debt, and you’re almost guaranteed to have excellent credit.”

The Bottom Line

It may seem like a scary task to build credit from scratch. But you’ll find that the time and effort you put into building and boosting your credit will pay off big in the long run. You’ll be more likely secure better interest rates, more rewards and bigger savings. While you’re building credit, don’t forget to keep an eye on your credit reports. This way, you can keep track of your increasing score or spot any mistakes in your report.

Tips for Using Credit Responsibly

  • Just like Jason Steele says, there’s really no way to go wrong when you make all your payments on time and in full. This practice ensures you don’t carry over a balance and accrue interest and credit card debt.
  • It’s always important to only take on as much credit as you can afford. Without a credit card, you wouldn’t spend $500 on headphones if you didn’t have $500 to begin with. A credit card can make it too easy to give in to these purchases. Then when the bill comes, you find yourself unable to pay and owing more than you’d like to admit. So while credit is a handy tool, always make sure you spend what you can pay back in a reasonable amount of time.

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Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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