Banks check customers’ credit scores before approving any loans, mortgages, and other lines of credit. However, some may not have a credit score, especially if they are young, have less borrowing activity, or have moved to the country recently. In such a situation, one must learn how to build credit from scratch. There are several easy ways to establish a credit history, such as getting a credit card and applying for credit-building loans.
Understand what a credit score is
Before trying to establish a credit score, beginners must understand what this is. Simply put, a credit score is a three-digit number indicating one’s creditworthiness or how likely one will default on debt payments. It helps banks assess their risk when lending money.
A credit score is calculated based on the information in one’s credit report, such as payment history, credit age, credit mix, credit utilization, and recent credit accounts. The number can change since different credit bureaus and scoring companies use different formulas to arrive at it. Understanding this credit score basics is critical for beginners.
Apply for a credit card
When establishing a credit history, one can start by getting a credit card. Credit cards for beginners do not generally charge annual fees or interest. Some also do not need one to carry a balance to start building credit.
Secured credit cards
Those who want to build credit from scratch or rebuild poor credit can consider applying for secured credit cards. These cards do not have any annual fee, but one must pay a security deposit. This deposit is refunded once the account is closed and the user no longer owes money to the credit card company. Secured credit cards report the account information to all the three main credit bureaus. So, one can improve their score by using the card wisely and making repayments in time.
Student credit cards
Those wondering how to build credit as a student can consider using student credit cards. Eligible college students who want to start building credit at 18 might find these cards useful. A student credit card may require a co-signer if one is below 21 years, but there are no annual fees or security deposits. These cards work as regular unsecured credit cards.
Retail credit cards
Popular department stores generally issue retail credit cards. These cards do not have strict approval requirements but have higher interest rates and lower credit limits. Besides, they can be used only at the store with which they are associated.
Become a credit card’s authorized user
Another credit-building tip is to become an authorized user of someone else’s credit card account, such as a family member or friend. After applying for this service, a person gets a credit card linked to the primary cardholder’s account, which they can use to make payments. Even though the family member or friend pays the credit card bill, the transaction activity appears on the authorized user’s credit report, helping them build credit.
It is important to note that not all credit card issuers report authorized user’s card activity to credit bureaus. So, one should check this before choosing a card issuer. One should also remember that the credit scores of both the primary cardholder and the authorized user are affected if pending dues aren’t cleared.
Get a credit-builder loan
CBLs or credit-builder loans are different from traditional loans. When someone applies for a CBL of, say, $1,000, the lender deposits this amount in a savings account, which cannot be accessed yet. Once this is done, the borrower must start making small payments to repay the $1,000 over a fixed term. Terms usually last between six and 24 months. After all the payments are made and the term is over, the lender pays out the locked money.
When thinking about how to improve credit score quickly, CBLs are good options to consider. Credit unions generally offer these loans. As and when one makes the payments, the progress is reported to credit bureaus, directly affecting one’s credit score. It is a good way to build credit without a credit card.
Add utility and rent payments to credit reports
Bills for rent, utilities, and phone usage generally go unreported to credit bureaus. Even if one misses paying them, it may not directly affect one’s credit. However, one can choose to add these bills to their credit report. If someone opts for this service and pays the bills on time, it can positively impact their credit history and credit score.
Make payments on time
Payment history is one of the most important factors when calculating a credit score. That’s why making timely payments on existing debts and loans, such as student loans, mortgages, or car loans, is crucial. Staying on top of current loan payments and lowering the debt can positively affect one’s credit. Meanwhile, falling behind on loan payments can negatively impact one’s credit history.
