The Nitty Gritty

Credit Building Basics Everyone Should Know

Having a good credit history is an aspect of your financial life. Financial institutions check your credit to determine how risky it is for them to extend you new credit or lend you money, and to set your interest rate.

One of the trickier things about building credit is that you need to have and use credit to develop a credit history, but lenders are often reluctant to approve someone with bad or no credit. Plus, a credit history takes time to establish.

So, how do you build your credit without any credit history or if you have bad credit due to past mistakes? Here are a few simple ways to get started.

Pay off your debts

Reducing existing debt, especially if you have been behind on payments, can eventually improve the likelihood that you are approved for new lines of credit. While you shouldn’t take out a loan just to build credit, paying your existing installment loans, such as personal or auto loans, on time regularly will start to make a difference over time.

Then, once you have begun to establish a better credit history, continuing to make on-time payments and keeping low balances will add to your creditworthiness.

Open a Secured Credit Card

Depending on your financial situation, you may not be able to receive a regular credit card. But with a secured card, you receive a credit line that’s based on a percentage of a cash deposit you make upfront to your financial institution. The amount you deposit is often the same as your credit limit and is usually at least $200, but this may vary depending on the card. These cards tend to have higher application and annual fees because of the risk the lender is taking on by extending the line to you.

But secured credit cards aren’t mean to be used forever. Use yours as you would a regular credit card, making small purchases and making payments on time to avoid being charged interest. Then, as your history of on-time payments builds, so will your credit score, meaning you can apply for unsecured credit cards with more favorable terms or rewards. Just be sure to avoid applying for too many new cards at once—this can negatively impact your creditworthiness.

Become an Authorized User

One way to build credit is to become an authorized user on someone else’s card. When a family member or loved one adds you to their card, their payment record for that card gets added to your credit history. This is especially helpful if they’ve been making on-time payments for a while. You’ll receive a copy of the card, but you do not need to have the credit card in your possession or use it to take advantage of the benefits.

Add a Co-Signer

If you’re unable to successfully apply for credit cards or loans on your own, ask a family member or other loved one with good credit to co-sign your application. This won’t add their payment history to yours in the same way becoming an authorized user does, but lenders may view you as less risky knowing a more creditworthy person is backing your application with their own credit history.

Be aware, however, that your co-signer is on the hook if you fail to pay, so you could risk your relationship with that person as well as the credit line they’ve co-signed for.

Conclusion

Whether you are new to credit or just trying to clean up your credit history after past mistakes, building a good credit history takes time. It’s best to begin by addressing your current debts and financial situation before applying for a loan or credit card.

But the work doesn’t stop there. You will need to continue to keep good credit habits, such as paying at least your minimum required payments on time, avoiding using too much of your credit and requesting your free credit report annually to check for errors and the status of any outstanding debts.

Once you’ve mastered the basics, you can give yourself a boost with more advanced strategies, such as requesting a credit limit increase on your existing cards.