How To Build Credit In 6 Easy Steps – Forbes Advisor

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You know that good credit is needed to live your best financial life. But if you are trying to build credit for the first time (or you want to help your child achieve this goal), you may not be sure where to start.

Your credit score comes from the information in your credit reports. Thus, building a good rating usually starts with opening some accounts that lenders will report to the credit bureaus. Once reported, these accounts will appear in your credit reports. it is up to you to manage them responsibly.

The problem with creating credit from the beginning is that you often need good credit to qualify for financing. Finding a lender willing to take a chance on you can be a challenge. Fortunately, there are banks and lenders that provide credit for beginners. There are also other strategies you can use that can give you a credit boost.

Here are six easy steps you can take to begin the process of preparation for mediation.

1. Start with a review of your credit reports

You can assume that you have zero credit, and to be fair, you may be right. However, it is important to take a look at your three credit reports for confirmation. Credit reporting errors happen every day. Just because you do not believe that there are accounts in your credit reports does not mean that you will not be surprised when you check them.

Federal law gives you the right to check all three of your credit reports for free once a year. However, due to Covid-19, you can receive free weekly credit reports until April 20, 2022. You can claim your free reports from Experian, Equifax and TransUnion via AnnualCreditReport.com.

Once you have downloaded your reports, take some time to review them. You need to make sure all the information available is accurate — including your name and address.
Hopefully you find your credit reports as empty as you expected. However, if you find inaccurate information or accounts that do not belong to you, you have the right to challenge this information with the credit bureaus. The Federal Trade Commission provides a useful guide to guide you through the credit dispute process.

Related: How to check your credit score

2. Consider a credit card

A credit card can be a useful tool when you want to build credit history and ratings. The vast majority of card issuers report account information to the three credit bureaus — an important fact to keep in mind when trying to build credit. If a lender or bank does not report an account to the credit bureau, the account can not help you build or improve your credit rating.

You can use credit cards to create a credit profile free of charge. You can also avoid interest charges on your new account if you pay your full account balance each month.

If you decide to go it cheap and risk the low bandwidth you are only fooling yourself. You do not want to apply for accounts that you may be denied. Premium travel rewards credit cards, for example, are probably not a good choice when you are just starting out. Most card issuers require a good to excellent credit score to qualify for such accounts.

People without credit or limited credit may want to consider the following types of credit cards:

  • Secured credit cards. Secure cards require a deposit at the issuing bank, which is usually equal to your credit line in your account. So a $ 500 deposit generally gives you a secure $ 500 limit. Because you support the account with your own money, the risk is less for the issuing bank, allowing you to obtain a card without credit or a corrupted credit profile.
  • Student credit cards. Unlike secured cards, many student credit cards do not require a down payment. In other words, they are uninsured. You will usually need to be at least 18 years old to qualify for a student credit card. If you are under 21, you will also need an independent source of income or a co-signer.
  • Credit cards subprime. If you’re lagging behind in previous payments, you may have a bad credit score. However, there are credit card issuers who may be willing to work with you and you may be eligible for secure and unsecured credit card options. However, keep in mind that interest rates and charges on such cards may be higher than average.

Related: Best First Credit Cards For Credit Generation 2021

3. Look for a credit line

You do not have to take on new debt just to build credit. Therefore, do not rush to buy a car or a house with the sole purpose of creating a credit score. However, there is one type of loan that you can apply for that might help you build credit and a small savings box at the same time: a credit line.
Credit loans are available from online lenders and many local credit unions. Unlike traditional personal loans, a home equity loan does not give you access to the funds you are borrowing right away. Instead, the lender keeps the money you borrow in an interest-bearing savings account. Once you make the final payment of your loan (usually about six to 12 months later), you will receive the funds plus any interest earned.

A home equity loan can help you build your credit under the following conditions:

  • The lender reports the account to all three credit reporting agencies.
  • Make every loan payment on time.

Keep in mind that credit cards are not free. The lender will charge you interest and commissions, which will exceed the interest you earn on the account. However, many consider the cost of the loan to be a small price to pay for the opportunity to create credit and a small emergency fund at the same time. Whether the cost is worth the potential benefits for you is a personal decision.

4. Use the Authorized User Strategy

Another approach you can use to add accounts to your credit report is known as an authorized user strategy. It involves asking a friend or family member to actually share his or her good faith with you.

Initially, your loved one calls the issuer of their credit card and adds you to an existing credit card as an authorized user. The card issuer will send your loved one a credit card in your name that is linked to the main account. If you make card debits, they will appear in the next credit card transaction of the cardholder. (Your loved one may also choose to keep the card in their possession instead of handing it to you.)

This is where the magic can happen. Many credit card issuers report authorized user accounts to the three credit bureaus. So, if the account appears in your credit report, you could suddenly have a good chronic payment history linked to your credit profile. When the strategy works well, your credit score could potentially see a big jump as a result.

On the other hand, there are risks. The card could damage your credit instead of helping you if late payments or high credit use are associated with the account.

An authorized user account may benefit you under the following conditions:

  • The card issuer has an account information reporting policy at all three credit bureaus for both the primary cardholder and authorized users.
  • The account has a perfect payment history.
  • Your loved one has a low debt-to-limit ratio.

If someone adds you to a credit card as an authorized user, do not assume that you have completed credit creation. It is also important to create accounts in your name and manage them responsibly. But if you can become an authorized user on your loved one’s card first, chances are you will qualify for better deals when you embark on your credit-creating journey.

5. Practice responsible credit habits

Opening a new credit account is part of creating credit for the first time. You will also need to practice responsible credit habits to ensure that your credit does not face significant pitfalls, which will require you to correct your credit early. The last thing you want is to damage your new credit profile right outside the gates. Follow these responsible credit habits to help you build a strong credit profile:

  • Try to make your payments on time or early, ensuring that your balance is paid in full each month.
  • If you choose to open a credit card, try to keep your credit card usage rate below 30% but above 0%.
  • Avoid applying for multiple credit bills in the short term.
  • Keep old credit card accounts open even if you no longer use them. This can help increase the average age of your credit history.
  • Spend or borrow only what you know you can afford to repay.

6. Be patient

A good credit score does not come overnight. In fact, the first bill that appears on your credit report must be six months old to qualify for the FICO Rating criteria. (Tip: Authorized user strategy can help you quickly track your credit score.)
However, if you follow the procedure and earn good credit scores, the effort can pay off in the end. The lifetime value of great credit can be tens of thousands of dollars, and maybe even more.

Increase your FICO® rating instantly with Experian Boost ™

Experian can help you increase your FICO® rating based on billing, such as your phone, utilities, and popular streaming services. Results may vary. See the website for more details.

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