Good credit is the key to many things. Your credit score will impact your ability to get a credit card. It will affect your ability to get a loan. It will be a factor when you apply for housing. For all these reasons and many more, it is important to build credit and establish a history for responsible payment habits. A strong credit score can open doors; a bad one can close them.
In this blog post, we will take a closer look at what it means to build a credit score. From getting a credit card (or figuring out how to build credit without a credit card) to building credit fast, we will cover all the basics that you need to know to start establishing a favorable credit history.
The Power of a Good Credit Score
Let’s start by talking a bit about why it is important to build a credit history in the first place. Why is a good credit score so valuable?
Think of it this way: when you apply for a job, a prospective employer will investigate your past to understand what you might do in the future. They’ll review your resume information, such as education and employment history, to see if you are qualified for the job at hand, whether you’ve held similar positions with similar responsibilities in the past, and what you’ve accomplished at those jobs. They’ll also probably check your criminal history, to look for red flags that might put their business at risk.
A very similar approach applies with entities that care about your credit history. The only big difference is that instead of focusing on your work history or your educational background, these entities want to know about your financial track record. When a credit card company, bank, or potential landlord runs your credit, they are all wanting to know the same thing: whether you can make payments reliably. A good credit score, in the simplest of terms, reflects your ability to make payments on time and in full. A bad credit score might show that you are behind on payments, carrying a lot of debt, and maxing out your credit cards (or at least exhibiting high credit utilization).
A bad credit score identifies you as a “risk” to a lender, credit card company, or landlord. These entities want customers who make payments on time and are generally reliable. They don’t want to take risks on customers who may default on their loan, fall behind on their credit card payments, or never pay rent.
Landlords will often avoid low-credit tenants. They don’t want to worry about potentially having to evict you over missed payments. As for loans or credit cards, even if you can get a creditor to accept your application when you have a poor credit rating, you are going to going to get less favorable terms than someone with a higher credit score would get. Expect high interest rates, rigid repayment terms, and significant fees and service charges.
Establishing Your Credit
As you can see, it is to build credit score history and start establishing yourself as a reliable customer and debtor. The hardest part of this process is often just getting started. For instance, if you are a teenager just starting college, your credit is probably nonexistent. How can you get a credit card if you have no credit? How can you build credit without a credit card? It’s a classic “chicken or the egg” scenario, and it makes building credit especially frustrating for young people.
If you have no credit to speak of, your first step is establishing credit. Often, doing so will require an adult willing to co-sign for a credit card, a loan, or a housing lease. Creditors or landlords will be willing to grant an application to someone with no credit if there is a reliable co-signer on the application, too. The idea is that, even if you can’t make your payments, a creditor will be able to go after your co-signer for the amount you owe.
Another option is to have a parent, family member, or significant other add you as an authorized user on their credit card account. Most credit card companies will report authorized user activity to the credit bureaus. As such, your payment activity as a user on another person’s credit card account can help you establish and build credit. Furthermore, the entire card’s payment history will suddenly become a part of your credit background. A card with a long and positive history, then, can help your credit a lot. You will need to work out an agreement with the primary cardholder to determine 1) how much you will use the card, and 2) how you will pay your share of the bill.
With a co-sign or authorized usership, someone with no credit will be able to start building credit. Make purchases with your credit card and pay the card off on time. Instead of just making minimum payments, pay off the full amount. Especially if you are looking to build credit fast, those full payments will move you along a lot more quickly than paying the bare minimum. If you struggle to pay off the full amount on your card, reconsider how you are using it.
A good mental hack is to treat your credit card as if it were a debit card. You don’t want to put more transactions on your card than you could pay out of your bank account without an overdraft. Some people treat credit cards as if they were “free money,” making big purchases without thinking about how they are going to pay for them. This practice leads to a cycle of minimum payments and credit card debt that will ultimately torpedo your credit rating. Spending modestly on your credit card will also help you keep your credit utilization low, which will provide additional credit score boosts. Credit utilization is how much of your credit card limit you are spending each month. Experts recommend keeping your credit utilization ratio at 50 percent or less, with 30 percent often being cited as the sweet spot. So, if your credit card limit is $1,000, try not to spend more than $500 on that card in a billing period (and aim for $300, if you can).
In addition to using your credit card and paying it off regularly, take care to pay your rent and utility bills on time each month. As you establish a strong payment history with these entities, ask them to report your payment history to the credit bureaus. Those payments can help your credit score and are terrific ways to build credit, especially early on in your credit track record. Alternatively, you can use services such as Rental Kharma or Rent Reporters to get your rent payments added to your credit report.
If you don’t have a co-signer who will help you establish your first credit card account, the next best option is to ask your bank about getting a secured credit card. Think of a secured credit card as a hybrid of sorts between a credit card and a debit card. You will have a credit limit and will need to make payments on the card, as you would with a traditional credit card. At the same time, the card is tied to a checking or savings account, similar to a debit card. Using a secured credit card is a good way of getting in the habit we discussed above, of treating your credit card as if it were a debit card. The only drawback with this type of card is that your credit limit will typically be low, which means you won’t be able to use it very much each month if you are going to keep your credit utilization low. The good news is that, after establishing a reliable payment history, you should be able to ask your bank either to increase your credit limit or to convert the secured credit card into a traditional credit card.
Once you have established your credit, the next step is to build it into something of which you can be proud. There are ways to build credit history, both relying on a credit card and not using a credit card at all, depending on your preference. If you would prefer not to use a credit card, here are a few strategies you can use to score upticks on your credit report:
Pay your student loans on time. If you have student loans, you might as well use them as a credit booster. Making your student loan payments on time each month can help you build credit.
Get an auto loan. It may sound counter-intuitive since buying a car is a significant financial transaction. However, the truth is that an auto loan can be one of the best ways to build credit without a credit card. Auto loans are typically the easiest type of loan to get approved for—with good terms, to boot—and offer manageable monthly payments that can enable solid credit growth. At Resource One Credit Union, we’d be happy to help you look into auto loan possibilities for your next vehicle purchase.
Use a service such as Experian Boost. Paying your utility bills or cellphone bills every month is good evidence that you can responsibly handle repayments. Somewhat unfairly, though, these practices typically don’t show up on your credit report. Utilities will usually only reflect on your credit if you fail to make payments and your debt gets sold to a collection agency—something that will severely harm your credit score. Experian believes that customers should have the option to have these more “minor” monthly payments reflected on their credit reports. Experian Boost makes that option a reality.
If you are using credit cards, just keep doing what we’ve already discussed: make your payments on time and in full every month while being cautious about how much you spend. Keeping credit utilization low—and not opening a dozen different credit card accounts, but keeping it to three or four—will help too. Finally, don’t go applying for lots of credit cards all at once. Do some research and pick out one or two cards that catch your eye—ideally with favorable terms or attractive rewards—and apply for those. Submitting lots of applications will result in a slew of credit card companies pulling your report at once, which will hurt your credit score.
Get the Help and Support You Need at Resource One Credit Union
At Resource One, we are here to help you establish your credit and start building a favorable payment history. Whether you are a parent getting your child ready for their financial future or an adult working on getting out of debt and improving your credit rating, we can lend a hand by offering checking accounts, savings accounts, secured cards, credit cards, auto loans, and other financial services with favorable terms. To learn more, contact us directly or visit a Resource One Credit Union near Dallas or a Resource One Credit Union near Houston. We can’t wait to hear from you.