Almost as soon as you graduate from high school, you must begin thinking about a personal finance strategy that will help you achieve your goals. Any strategy you develop will depend on your ability to build credit, but you’ll likely find that it’s difficult to build credit without already having credit. While this paradox can be frustrating, there are things you can do to help yourself acquire the credit you need to move forward.
Be Cautious When Using A Tradeline
You’ll usually encounter this option through a credit repair service, but they can also be found online. A tradeline is an account in good standing that will allow someone with poor credit to buy into it as an authorized user for credit repair purposes or boosting their credit score. For the fee, you’ll be listed as a user on the account that has a good credit standing, which will result in an almost instantaneous boost to your credit score. There are two ways for you to enjoy a tradeline: you can ask a family member to list you under their credit cards or work with a company that solely provides this service.
Unlike other strategies to build your credit, using a tradeline is one of the easiest and fastest ways for you to build credit. You won’t have to spend a lot of years to improve your credit score because you can experience its benefits almost immediately.
The downside to this is that the credit bureaus are aware of these services and have developed methods for identifying when someone is using a tradeline. If you’re discovered using this method, you may be penalized. When this happens, you’ll be starting from scratch and will likely have a hard time to build your credit once again.
The best way to build credit is to establish yourself as a good risk, which means maintaining real accounts and making your payments on time. This process will require time, which is why you should exert time and effort to accomplish this goal.
Start With A Student Loan
Your parents will probably have to cosign on your student loan in order for you to get approved, but, from there, you should take on that responsibility yourself. Making the payments on your own will help you build credit, but make sure the payments are made on time. Even one late payment can result in a negative impact on your credit report for years; one late payment can become the reason why you’ll struggle to earn a good credit score. However, if you can make your payments on time, you’ll begin to create a good credit profile. Paying off your student loan early and on time can be a great start in building your credit even if you’re still a student. If you have to borrow the money to pay for your education, you may as well use the loan to your advantage.
Get A Secured Credit Card
As you consider getting a credit card of any type, it’s important to understand that this is not free money to splurge on big ticket items. A credit card can provide a lot of benefits, but remember that being irresponsible when using it can also result in financial stress, debts, and even bankruptcy. Instead of using your credit card as a means to buy impulsively, your credit card should be used as a tool to help you build credit.
The goal should be to use the card to buy small items, so the charges can be paid off within the same billing cycle. As much as possible, do not use your credit card to make big purchases, such as buying a car or appliance, as these can translate into higher interest rates, which can be very difficult to pay in the long run. A secured credit card is linked to a checking account, so that it can serve as a training tool. Your credit will be limited to the balance in your checking account. In most cases, you must maintain a $200 balance in the checking account, which will be sufficient to give you a $200 credit limit on the card.
Try A Credit-builder Loan
Typically, when you apply for any loan, you have to explain why you need the money. Depending on the amount you want to borrow and where you’re going to borrow it, you might even have to provide several documents to prove your purpose. This is just one of the differences with a credit-building loan, because the primary reason for the loan is to build credit.
August Funding points out that this type of loan also differs in the sense that you won’t receive the money once the application has been approved. Instead, the money will be set aside for you in a special account managed by the lender, while you repay the loan. Your loan payments will be submitted to the credit reporting agencies, which will help you build up credit. Once you have repaid the loan in full, you’ll receive the money you have borrowed.
Ask A Family Member To Add You As An Authorized Credit Card User
Another option suggested by August Funding is to ask a parent or other family member to add you as an authorized user on one of their credit cards. It’s important to ensure the cardholder has good credit, and you’ll have to work out the terms under which you’ll be able to use the card. Additionally, make sure authorized user activity is reported to the credit bureaus, otherwise your use of the card won’t help you build up credit.
Use A Rental Payment App
One reason that people turn to home ownership over renting is that mortgage payments help you build equity, while rental payments serve no beneficial purpose. Mobile apps, like RentTrack and Rental Kharma, are changing that by reporting your rental payments to the credit bureaus. This means each rent payment you make will go toward boosting your overall credit score. While it may take a while, using one of these apps can help you build up a good credit score so you can buy a home of your own. This can also be very convenient since you won’t have to regularly visit any credit bureaus to update your credit score.
Don’t Fall Behind
August Funding warns that your payment history comprises a third of your total credit score. While this means on-time payments work to your advantage, the opposite is equally true. Even when on-time bill payments may not be reported to the credit bureaus, late payments will usually be reported. Each late or missed payment will cost you points on your credit score, bringing it down that much further. This means you’ll go from trying to build good credit to trying to repair bad credit.
Regardless of the method you’re planning to try to build your credit, make sure that you’re committed to your responsibilities as a payor and pay all of your dues on time. If possible, make payments before your due date. The faster you can pay off any debt, the better it’ll be for your credit score.
Maintain A Good Credit Utilization Ratio
According to August Funding, another factor that goes into determining your credit scores is your credit utilization ratio. This is a comparison of your total allowable credit versus the amount you owe. For instance, if you have three credit cards and each card has a credit limit of $500, you have a total allowable credit of $1,500. If you owe $200 on each card, you owe a total of $600. This is a good ratio because the majority of your credit is still unused. However, if you owe $400 on each card and you’re not working to pay down that debt, you have a poor credit utilization ratio. This will continue to have a negative impact on your credit score until you can pay off a large chunk of that debt. Thankfully, credit utilization has no memory, meaning this aspect of your credit score will improve or get worse month by month depending on your current utilization.
Stick With One Or Two Cards
People often think they’re doing themselves a favor by applying for new cards that offer low introductory APRs. The intention is to pay off their debt before that introductory offer runs out, but they rarely do that and merely end up owing a different company that same amount. It’s much better to hang onto the credit cards you already have and work out a good strategy for paying off your debts. If you can keep those cards over a long period of time, you can establish your reliability as a borrower. This can have a positive impact on your credit score.
Review Your Credit Report Annually
Everyone is entitled to a free report from all three credit reporting bureaus once per year, although few people take advantage of this opportunity. Most people only think about their credit profile when they want to qualify for credit. There are a few reasons to review your credit reports every year. First, it’s important to ensure all three reports accurately document the same transactions. Mistakes do happen, and unless they’re caught and corrected, they can negatively impact your credit score. Additionally, you may discover possible identity theft occurrences. If you suspect this to be the case, you should report your suspicions to the credit bureaus immediately. It may also be wise to notify your banks and credit card issuers, since you will likely need new account numbers and replacement cards.
Try Store Credit Cards
If you have a favorite store, it might be easier to get a credit card that’s specific to that store. Since you shop there regularly, you’ll have plenty of opportunities to use the card and build up your credit rating. Just be wary of building up debt on these cards. They often carry a higher interest rate than other types of credit cards, which means it will be even harder to pay off large amounts of debt. Keep in mind that the card should only be used as a tool to help you build up a good credit score.
Refinance Your Car Loan
If you’re in your first car, your parents likely cosigned the loan for you. You may also be paying higher interest on the loan. If you have had the car long enough to have built equity in it, you might want to consider refinancing the loan. This can help you become the sole borrower on the loan, while also providing an opportunity to get a lower interest rate. Just keep in mind that the vehicle is depreciating, so take that into account as you analyze the terms of your new loan. Paying on an auto loan is a great way to establish a good payment history and help you build up a good credit rating.
Pretty much everything you do in life will require a good credit rating. Even getting the job you want may rely on having a good credit score, so building credit quickly is essential. These tips can help you get a good score a little faster, so you can move forward with your life goals much more efficiently. There are no shortcuts to building a good credit profile, but if you follow these suggestions, you may be surprised by how quickly your credit score rises.