Ways to establish credit
These are several ways to build credit. When used in combination, you may see quicker results than if you just pick one method.
Apply for a secured credit card
When you are first building your credit, you may not qualify for an unsecured or “regular” credit card. This may be due to either a low credit score or not yet having any credit score.
A secured credit card may be an option to establish credit that may eventually help you qualify for other cards with higher limits and better rates. A secured credit card means you put money down to secure the card, which serves as a guarantee to the card issuer that you can pay your bill when it’s due. Your deposit often is equal to your credit limit.
Correct errors on your credit reports
It’s a good idea to check your credit report from each of the three nationwide credit bureaus periodically to make sure there are no errors that may lower your credit score. Many financial experts suggest you review your credit at least once a year. You are entitled by law to a free credit report every 12 months from each of the three nationwide credit bureaus. Typical errors include:
- Other people’s information on your record by mistake (most commonly someone with the same name or a spouse/ex-spouse)
- Missing information that could boost your score, such as payments made or a loan paid in full
- Incorrect amounts owed
- Completely wrong information (common with identity theft)
If there is incorrect information in any of your reports, follow that bureau’s instructions for how to correct it. Then, follow up to make sure the corrections have been made.
Maintain a low credit utilization rate
Your credit score is calculated using numerous factors. A credit score may, for example, take into account your use of credit by comparing the amount of revolving credit you have available to how much credit you are currently using. A good rule of thumb is that you keep your balance below 30% on all of your cards. To calculate your credit utilization ratio, divide your total balances by your total credit limit. For example, if your balances are $7,000 and the total of your credit limits is $26,000, your credit utilization ratio is 26.9%.
Stay under your credit limit
It's smart to stay under your limit on each credit card because going over your limit might cause you to incur fees and extra payments that only make it harder to build good credit.
Pay past-due bills
Pay your bills on time and immediately pay past-due bills, especially before they appear on your credit report. If you go too long without paying a bill, the creditor could report your delinquency to the credit bureaus, which might bring down your score. If you are paying an old debt that is a negative mark on your credit report, ask if the creditor will remove it from your report in return for payment in full. Helpful ways to avoid past-due bills in the first place include scheduled automatic payments, an online bill payment system scheduled in advance, and signing up for banking alerts.
Apply for a credit-builder loan
A credit-builder loan can be another great way to build credit. They often work like this:
- You apply for the loan with the money you borrow held in a bank account.
- You make payments like with any other loan.
- Your payments are reported to the three credit bureaus.
- Once the loan has been fully repaid, you have access to the money that has been set aside, plus you reap the credit score benefits.
Get a co-signer
Sometimes people with poor or little credit have trouble getting a credit card or loan. One solution to this may be to get a co-signer for your loan. This is someone with excellent credit who agrees to be responsible for your debt should you default on it. For young people, a parent usually serves as a co-signer.
Become an authorized user on someone else's credit
Similarly, you can become an authorized user on another person’s credit card. Again, this is often a parent’s card, but this method also works with spouses who have good credit. You get the benefit of their credit history associated with the card, in addition to the chance to use credit responsibly. The key here is to make sure the other person never makes late payments or defaults on their card. You should consider contacting the card issuer to make sure that they report information on authorized users to the credit bureaus.
Build credit for rent you pay
Your rent payment can also help you in your quest to build credit. There are services now through which you can pay your rent, so it gets reported to the three credit bureaus. Why not use your biggest monthly expense to build credit over time?
Consistently focus on paying your bills on time each month and keep your balances as low as possible. For more information about home, auto, and personal loans, visit any Huntington branch.
