How do I build credit?
Establishing a solid credit history will become one of your most powerful financial assets as you progress throughout life. It can impact your ability to get a job, purchase insurance, finance a car or rent an apartment.
When it comes to your credit score, you're most likely familiar with your FICO® score. FICO scores helps lenders determine your likelihood of repaying credit on time. FICO scores consider five different areas of financial history to determine creditworthiness: current debts, payment history, new credit accounts, length of credit history and types of credit used. However, if you have limited credit history it can be difficult for lenders to extend credit based on your FICO score.
So what can you do to help build your credit? Here are some tips:
Pay your bills on time
While your FICO score is a key component in determined credit worthiness, there are other helpful ways to track your credit score and visualize how you are building credit. One way is through your VantageScore. VantageScore is a scoring model developed by the three major credit reporting agencies that can provide a reliable picture of your creditworthiness as well.1
Both FICO and VantageScore take late payments into consideration. VantageScore also incorporates non-credit related bills, like rent and utilities. This is why it is very important to pay all your bills on time, every month. It will help to avoid late fees and negative marks on your credit report, and help increase your VantageScore.
Become a co-borrower
Asking a trusted friend or family member to open a joint credit card with you will give you access to credit and enable you to start building a credit history. As a co-borrower, you’ll receive a credit card in your name and you are legally responsible for the debt associated with the account.
Being a co-borrower can have its advantages and disadvantages, as you'll inherit the other cardholder's credit habits. If you and the other borrower make consistent on-time payments and keep your balances below the credit limit, this can be a great option for you. If you or the other borrower misses payments or often lets your balances reach or exceed the credit limit, you risk damaging your own credit score.
Apply for a secured credit card or store credit
A great option to help you establish or rebuild credit is to start with a secured credit card. They're just like other credit cards, but require a security deposit to "secure" the card. Your credit limit is typically the amount of your security deposit. Just as with a regular credit card, you can build credit with a secured card through responsible use and making your payments on time. Plus secured cards can offer incentives like travel or cash rewards.
Major department stores are often more lenient in giving credit to someone with limited credit history. This comes with a price, however, in the form of a much higher interest rate. So if you're able to get a store card, be sure to pay off your balance each month to avoid hefty interest rate charges.
The bottom line
Building a positive credit history will take some time. But when it comes time to buy your first home, finance a car or apply for a bank loan, you’ll be glad you built a solid credit history first.
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