If you want to establish your credit score, it is important to take the necessary steps so you are prepared for your financial future. Recent graduates who are new to the financial world often find themselves stuck wondering how to navigate through certain obstacles. Young adults who are eager to move out of their parents house to quickly rent an apartment find themselves struggling to get approved by landlords due to a lack of credit history. Individuals who want to make a down payment on a new car loan or simply have a credit card accessibly, it is important to work on building credit history.
Credit cards were introduced to enable consumers to make purchases without cash on hand, to be paid back at a future date in time. Credit cards can offer benefits to consumers by providing rewards for certain expenses, cash back from merchants and access to exclusive programs based on your card membership.
There are multiple steps you can take to establish and build your credit score. By taking carefully planned steps, being strict with how you spend your money and pay your bills on time, it is possible and within reach to build a good credit score. Below are some early steps to take to build a healthy credit history.
Open a Bank Account
It might surprise you but a lot of Americans don’t have a bank account. If you don’t have a bank account, do your due diligence and find a good bank that fits your lifestyle. Depending on your lifestyle, there are online banking options and local banks in a neighborhood near you. Bank accounts are helpful to keep your money secure, liquid in case you need to make payments and the good banks will actually pay you money to bank with their company.
Establishing a bank account is the first step towards building your credit. It will enable you to pay off any debts and monthly expenses as needed. A bank account gives you a place to save your money and grow your financial foundation. If you are already a member of a bank, speak to your customer service representative to find out if they offer credit card options that fit your lifestyle with favorable rewards that you are eligible for. There are countless local or online banks and financial institutions that offer credit card options for recent graduates, young adults and newcomers to personal finance.
Find a co-signer
To establish your credit score and maintain a good credit score involves patience. Even when you take the necessary steps, landlords still might give you trouble about your credit history. Sometimes a lack of credit history prevents people from getting approved to rent an apartment, forcing them to find a co-signer.
The easiest way to get an early start on building your credit score is by asking one of your parents to co-sign on your loan. A co-signer is simply a person who is agreeing to take responsibility for your loan if you decide to stop making your payments. Co-signers typically already have good credit and need to trust you to honor the loan payments. If you do not make timely payments, both your credit score and your co-signer’s credit score will suffer. If you end up defaulting on the loan and stop making payments altogether, your co-signer is legally responsible for paying the remainder of the loan.
Student Loan Payments
If you’re a student, you’re in luck. There are a few different ways students can break into the financial world and start building their credit score. If you took out student loans for college, you can start building your credit history early. As you pay off your Federal Loans, this will help you build your credit score.
There are also added benefits for full-time students with low barrier-to-entry credit card options offering upgrades to graduates in the future. Although student cards might not include the lowest APRs or the most lucrative reward programs, the limited card provides you with a good option to start your credit history.
Recent college graduates are weighed down by student loans, however, you can use these to your advantage. Either way, you need to start making your student loan payments sooner rather than later. Depending on your student loan, usually you are forced to start paying back your loan within six months of graduating. Making your student loan payments on time is a great way to start establishing good credit scores.
Early in your professional adult career, making payments on time shows creditors and banks that you are responsible and more importantly accountable for your finances. This is how you can make progress in your journey to establish your credit score.
Get a Secured Credit Card
Sometimes it is not so east to get approved for a credit card. If you have applied for a credit card in the past and were declined due to a lack of credit history or good credit, a secured credit card might be a viable option. A secured credit card is similar to a debit card as it requires you to send in an initial deposit to secure funds on your card.
At first, your credit card limit will be the same as your deposit, however you can increase your credit limit once you start to make payments and establish a payment history. It is critically important to make your credit card payments on time.
When you make your payments on time, you will start to increase your credit score and raise your spending limit. When you do not make your credit card payments on time, you will incur additional fees from your credit card issuer which will cost you more money in the end. It is critically important to make your credit card payments on time.
Open a Store Card
Department stores and big box retailers will often offer their own credit cards to their valued consumers. These stores are more lenient on credit requirements and can make it easier for you to get issued a credit card with little to no credit history.
Similar to Secured Credit Cards, it is critically important to make your credit card payments on time. If you are able to get approved for a store card, be sure to pay your bill on time! Department stores or retail cards will charge very high interest rates. Paying late will not only impact your credit history, but it will also cost you a lot more money than you initially anticipated.
Financing a Car
This is also an issue with people who are saving up for a new or used car but can’t afford the vehicle in full. Whether you need a co-signer or not, financing an automobile requires a credit history and can be used to build your credit score in the future. Instead of paying off a car in full, sometimes it is a good idea to finance the car to build your credit.
After making a few payments on time, pay down the entire debt in full. Making those timely payments and then paying off your debt in full will help establish and build your credit history. It is so important to be able to pay back your financing quickly, otherwise you can find yourself in a heap of debt. Many times with auto loans, you will be issued higher interest rates than normal if you do not have credit established.
If you cannot afford your monthly payments, it is a good idea to not take out an auto loan. Instead, focus on the easier steps like opening a bank account and a limited secured card before getting into loans to build your credit history.
Do What’s Right for You
There is no need to take out an auto loan just to establish credit, there are better choices with safer options to build your credit. Making early payments on student loans, making timely payments on your secured credit cards and maintaining a low monthly balance will help keep a healthy credit score for your financial profile.
It’s not an overnight process, but you can build a better credit score within a matter of a couple of years. It can take several more years to build a higher credit score in the 750+ range. Maintaining your credit score takes diligent work and consistency in paying your bills on time.
You can learn new strategies to build your credit score, techniques to eliminate bad credit and use helpful credit reporting mobile apps to stay on top of your financial profile.