How do I establish credit?
Article brought to you by Ollo and authored by Shannon McLay, Personal Finance Expert and Published Author.
There are a number of factors that go into calculating your credit score; however, roughly half of your FICO® Score is made up of two elements: your payment history and the length of your credit history. So, the first step in building credit is to start your credit history. If you have never applied for credit in the past, you will find that when you do apply for it, lenders may not be willing to take a chance on you. If you have no credit or a low credit score, how can you build credit then? Luckily, there are some options.
If you are in college, a few credit card companies offer student credit cards. The available credit line is typically low; however, the cards are unsecured cards, which means you do not have to provide cash upfront in order to get the card. If you are out of school, you can try applying for other unsecured credit cards; however, you may not get approved if it’s your first credit card.
One solution for building credit history when you can’t get it on your own is to have someone you know like a parent or relative add you as an authorized user on his or her account. As an authorized user, you are entitled to use the credit card; however, you are not responsible for the amount that is outstanding. The authorized user approach, though, is only going to help build your credit if the lender reports activity on the primary user as well as the authorized user to the credit bureaus and that the activity would be favorable such as on-time payments, and low outstanding balances.
The authorized user option is helpful to give you a start in building your credit history; however, as long as you remain on that card, your information with the credit bureaus will be tied to the other user. If the other user is responsible with the card, then this is good news for you; however, if they’re not, it could lead to trouble. You could be building a credit history that won’t help you in the long run.
If you don’t want to build credit with someone else and you can’t get an unsecured credit card on your own, then a secured credit card could help you build your credit. With a fully secured credit card, you provide the lender with cash and the cash you provide becomes your credit limit to use on the card. For example, if you send $500 to the lender, you will typically be given a secured credit card with a $500 limit. A partially secured credit card will allow you to secure a credit line that is higher than your deposit, although you will still need to provide some cash up front. It’s important to note that despite making a cash deposit, you still must make payments on your card balance each month.
No matter how you start, once you get your first form of credit, it’s important that you use it in a responsible manner so that you are creating a credit profile of someone whom lenders want to lend to. Lenders will want individuals who pay them back and pay them back on time.
Once you get a new card, at the very least, consider signing up for auto payment for your minimum monthly payment every month. This ensures that you are consistently and promptly making payments every month. You should also try to keep your monthly balances at a reasonable level. Lenders will look at how much you utilize the credit line you have available.
If you consistently follow the practice of using your card, paying it down and managing your balances prudently, over time all of this positive activity that is reported to the credit bureaus will impact your credit score before your eyes. If you are starting to build your credit, it will probably take some time before you see significant results, but like anything in life, with patience and persistence, you will build a credit profile that will help you in the future when you need credit for big purchases like a car or a home.
This article is provided to you solely for education purposes. It is not intended to provide you with any specific legal, investment or financial advice and you should not solely rely upon this in making financial decisions.