4 Credit Tips for Someone Just Starting to Build Credit

Building credit is like trying to get your first job after you graduate. Many entry-level candidates often hear that they need experience. But how can you get experience unless someone gives you a chance? Unfortunately, individuals without a credit history appear like entry-level applicants to creditors. Since you don’t have a track record, they’re not sure if you’ll pay back the money they lend you.

Still, there are ways to build a credit history if you’re just starting out. Some lenders have credit cards and loans designed especially for those who need to establish their credit. Plus, there are a few unconventional options like having credit bureaus report your payment history for monthly utility bills. However, the most important thing is to practice good spending and payment habits. Below are four tips for creating a solid credit history if you don’t have one.

1. Get a Secured Card

Conventional credit cards might be out of reach if you’re just starting out. However, most people can qualify for a secured credit card without a credit history. These cards allow you to open up a credit line as long as you make a deposit. The deposit amount usually becomes your credit limit and guarantees the lender will receive payment for your charges.

Once you receive your card, you can use it just like you would a traditional line of credit. You can use it at stores or online to make purchases. You’ll be able to charge up to your monthly credit limit and receive a statement.

A minimum payment will be required, and interest will accrue on any balances you don’t pay off in full. The lender will report your usage and payment history to all three credit bureaus, establishing your credit report and score.

Just as with conventional cards, it’s imperative to use secured credit lines responsibly. Try not to charge more than 30% of your limit each month. Pay your balances in full or at least more than the minimum monthly payment. You don’t want to charge more than you can afford and end up with expensive interest charges that will accumulate.

If the lender sees that you’re responsible, you can become eligible to convert your secured card to a conventional one. You’ll get your deposit back and probably qualify for a lower interest rate. To keep your credit score in good standing, maintain the same type of spending and payment habits. Don’t rack up high balances, pay off as much as you can each month, and make your payments on time.

2. Take Out a Credit-Builder Loan

A credit-builder loan is another way to build a credit history if you don’t have one. These loans aren’t traditional because the lender doesn’t give you the money right away. Once you’ve been approved, the money gets put into an account. The lender releases the loaned amount to you once you’ve paid for it in full.

The catch is you don’t have to pay for it all at once. You can make smaller payments over time, and the bank will report your payment history to the credit bureaus. But your payment schedule will work similarly to a traditional loan.

You’ll have a certain payment period, such as a year. Your payment amounts might also be fixed. For instance, the terms of the loan could stipulate that you make $50 monthly payments until the balance is paid.

A few things to keep in mind are that credit-builder loans are usually for small amounts, and not every bank offers them. These loans can often be less than $1,000. You’ll also stand a better chance of getting approved for one at a credit union rather than a traditional bank. But credit-builder loans are a viable option if you can wait for the funds and don’t have established credit.  

3. Ask to Be an Authorized User or Get a Joint Account

A relative or a friend can make you an authorized user on their credit card to help create your history. Some parents, for example, will add their children to their credit cards as authorized users. As an authorized user, the card’s payment history and usage will go on your credit report. The credit bureaus will generate a file for you, and you’ll start receiving a FICO score.

From the lender’s perspective, authorized users are not usually financially responsible for payments on the account. Authorized users don’t even have to use a credit account or card to build a history. But reports of the card’s history will impact all users’ credit reports regardless of who makes the charges and payments. This is why you’ll want to ensure both you and the primary cardholder maintain responsible habits.

Besides becoming an authorized user, you can take out a joint account or a loan with a co-signer. A co-signer’s credit history can help you qualify for a traditional loan. The loan amount and whether the payment terms are met will go on both your credit reports.

However, the lender will consider both of you responsible for making payments. The lender will still take action against you if the loan defaults. This is regardless of whether you and your co-signer agree on the side to split the cost. Negative payment histories, collections, and defaults will go on both of your credit reports.

4. Leverage Your Utility Bills

You can benefit from your on-time payment history if you pay for electric, gas, water, or wireless and streaming services. Some credit bureaus offer a free service where you can include your utility bills in your file. You can choose which bills to link and either establish your payment history or add to it.

As long as you’re making consistent on-time payments, some lenders will consider it as a positive indicator. They’ll view you as reliable and as a lower risk. Not all creditors will look at payment histories from utility bills, even if this information is factored into your credit score. That’s because your utility bills impact what’s known as a FICO Score 8. Some lenders use different FICO scores to approve or deny applications.      

Conclusion

Building a credit history takes at least a year of establishing responsible spending behaviors and on-time payments. Without a record of your financial habits, it might be difficult to get a creditor to give you a chance. Taking out secured cards and loans, getting joint accounts, and linking utility bills to your file can prove your merit. As long as you handle your financial obligations with care, you’ll build a credit history that lenders will find dependable.     

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