A good credit score is important. It gives you access to lower interest rates on loans, helps you get approved for apartments and can even give you a leg up when applying for jobs.
If you don’t have any credit or if you have bad credit, don’t worry – there are things you can do to build a positive credit history from scratch. Keep reading to learn how.
1. Get a secured credit card
If you don’t have any credit, one of the best things you can do is get a secured credit card. With a secured credit card, you put down a deposit that serves as your credit limit.
This is a great way to build credit because it shows that you’re responsible with borrowing and that you’re able to make payments on time. Just make sure that you don’t spend more than 30% of your credit limit in one month so that your credit utilization remains low.
Read This: What is a FICO Score and how is it calculated?
2. Become an authorized user on someone else’s credit card account
If you can’t qualify for a secured credit card or if you want to start building your credit even faster, ask a friend or family member if you can become an authorized user on their credit card account.
As an authorized user, you’ll get your own card linked to the account and you’ll be able to use it just like any other credit card.
The key here is to make sure that the primary account holder has good payment history because their history will become yours as well.
Read This: How to build good credit without a credit card
3. Use a “credit builder” loan from a local bank or financial institution
Credit builder loans are designed specifically for people who are looking to build or rebuild their credit.
With a credit builder loan, you borrow a small amount of money and then make payments over time. As long as you make your payments on time, this will help improve your payment history – which is one of the most important factors in your credit score.
Plus, once the loan is paid off, you’ll have the money in hand that you borrowed – talk about a win-win!
4. Pay your bills on time
Establishing a good credit history is important if you ever want to take out a loan, buy a car, or even rent an apartment. Paying your bills on time is one of the best ways to build a positive credit history.
When you pay your bills late, it reflects negatively on your credit report and can make it difficult to get approved for new lines of credit.
In contrast, paying your bills on time demonstrates your responsibility and financial stability, both of which are key factors that lenders look for when considering new applicants.
If you’re not sure where to start, set up automatic payments for your essential bills so you can be sure they’re always paid on time. By following this simple tip, you can help ensure that you always have a strong credit score.
5. Keep your credit utilization ratio low
Building a positive credit history is essential to maintaining a healthy financial profile.
One key factor in achieving this is keeping your credit utilization ratio low. Credit utilization is simply the amount of credit you’re using compared to your credit limit. For example, if you have a credit card with a $1,000 limit and you’re carrying a balance of $500, your credit utilization ratio would be 50%.
Ideally, you want to keep your credit utilization below 30% to maintain a good credit score. That means if you have a credit card with a $1,000 limit, you should keep your balance below $300.
By doing so, you’ll demonstrate to lenders that you’re capable of managing your debt responsibly and are less likely to become delinquent on your payments.
In addition, keeping your credit utilization low will help you avoid accruing unnecessary interest charges. So if you’re looking to build a positive credit history, be sure to keep an eye on your credit utilization ratio.
6. Don’t open too many accounts at once
One of the most important things you can do to build a positive credit history is to avoid opening too many accounts at once.
While it may seem like a good idea to open multiple lines of credit in order to establish a strong history, this can actually backfire. Too many new accounts can hurt your credit score, making it harder to qualify for loans or get favorable terms on credit cards. Instead, focus on building up a solid history with one or two accounts.
Make sure you keep your balances low and make all your payments on time. Over time, you’ll be able to prove your creditworthiness and qualify for the credit products you really want.
Next Steps
There are several things that you can do to establish a positive credit history – even if you don’t have any credit at all right now or your credit is at its lowest.
By following the tips above, you can begin building your credit so that when the time comes, you’ll be in good shape to apply for loans, rent an apartment or even land your dream job. So what are you waiting for? Get started today!
Erika Finn, founder of Credit Help, is an attorney who graduated from law school (JD) at University of California, Berkeley and is a member of the California Bar Association. She was a member and editor of the California Law Review and won the Prosser Prize for Legal Accounting. She holds a Master’s Degree (MFA) from the University of Southern California (USC) and a Bachelor’s degree (BA) from Indiana University- Bloomington with highest distinction.
Credit Help believes that everyone should have access to helpful, free information about how to raise their credit rating.
Articles on Credit Help are not legal advice or financial advice.