Building credit is one of the most important things to do for your finances. When the time comes to take out a large loan, such as a mortgage, if your credit is lacking, it will be difficult to get. The importance of credit also goes beyond your finances. Almost everyone you contact in the professional world will pull up your credit report; employers, insurance agencies, military, travel agencies, and so on. So how do you build the credit necessary to meet these challenges? Follow these simple steps to find out.
1. Check Your Score
This first check will help see where your credit stands. You can determine whether your score is good or needs improvement. Even if you have not used credit before, it is a good idea to check for any errors that might have been reported on you. You may also have a credit score if your name is under someone’s else’s account.
You can check your credit information for free once a year. The three biggest credit bureaus, Equifax, Experian and TransUnion, are required to provide you with a free credit report every 12 months. Just be cautious when filling out your information, if you are online, make sure your internet connection is secure and private. And never disclose any of this information to anyone.
A score of 670 or higher is considered a good score. A score of 740 or higher is considered very good. Anything at 650 or below requires improvement. If your score is doing well, jump down to the “ how to build credit for life: establish credit and good habits” section in this post or check out how to score an even higher credit score. If your credit score needs some big improvements, don’t worry, here are ways to build your credit.
2. Authorized user
If you have never used credit before, one of the most common ways to get a credit card and build your credit is to become an authorized user on someone else’s account. The card will have your name on it but will be under direct control of the account holder.
Being an authorized user requires trust on both sides. The only way you can build your credit is if the account holder pays their bills on time. However, the account holder also has to trust that the user will make smart purchase and not max out their credit. Find someone who you can trust and who trusts you as well.
3. Open a credit card
Establishing your credit is important because it shows how you handle your financial responsibilities. Obtaining a credit card is a good way to start building your credit. However, getting accepted for a credit card on your own with little credit can be difficult. Your application is more likely to be approved if you apply for a credit card at your current bank or credit union (if you’re in good standing). You could also try applying for a secured card. On a secured card, you deposit money on the card to cover your credit limit. A good rule of thumb: Don’t buy anything on a credit card today that you can’t pay for with a withdrawal from your bank account today.
Why is a credit card good for establishing credit? A simple low-interest credit card is a great way to establish credit because you can keep it for a long time. Age of your credit is how long you have had access to a line of credit and it’s an important part of your credit score. In fact, it makes up 15 percent of your score.
4. Credit Inquiries
Credit inquiries make up about 10% of your credit score. There are two types, hard and soft credit inquiries. Soft inquiries involve a quick lookup of a specific detail on your credit information with no real harm to your credit score. However, a hard inquiry involves a complete pull up of your entire credit history. While both are necessary, too many hard inquiries can lower your score. Hard inquiries occur whenever you apply for a major loan, mortgage, new credit card, or certain background checks. Again, while these things may be necessary, try to limit having your full credit report pulled. And always be aware of when your credit history is being pulled. If you are unsure, ask the lender, clerk, etc. with whom you are dealing with.
5. Vary your types of credit
Credit types make up 10 percent of your credit score. Different lines of credit and loans require different levels of responsibility, so having a mix of loan types is important. The versatility showcases how you can handle each kind. For example, someone who makes their monthly credit card payments on time, who paid off their vehicle loan, and is working on their student loans has a better mix of credit types than someone who has a credit card as their only type.
Remember not to take out new loans if you cannot afford them. You also want to make sure that your debt-to-income ratio is reasonable. Too much debt can negatively impact your ability to take out new loans in the future, such as a mortgage.
6. Cosigning
If you are just starting out and want to take out a loan, getting a cosigner is a good option and a great way to build your credit. When someone cosigns on your loan, both you and the cosigner are responsible for making the payments. When picking a cosigner, choose someone who has good credit, that way your monthly payments will be lower.
7. Increase your credit Limit
How much credit limit you have is actually big factor that effects your credit score. If you don’t use much of your credit up, requesting an increase in your credit limit is a great idea. The less you use vs the amount you have, the better. For example, using $500 of credit on a $3000 limit will improve your credit more than the same amount on a $1500 limit. You can contact your card provider to request an increase to your limit.
8. Establish good habits, build good credit
Make payments on time
When building your credit, one of the most important things to remember is to make your monthly payments on time. Payment history makes up 35 percent of your credit score. Your on-time payment history must be strong! It can be as easy as setting up automatic payments each month. Don’t worry about forgetting, think ahead. Also, make sure your reoccurring balance isn’t too high.
Monitor your credit score for improvement
Stay up to date with how your credit score is calculated so, you can know what areas need improvement. If you check your credit report, you will be able to see if you’ve developed any bad habits. By checking, you do yourself a favor to break bad habits as soon as you know about them.