The Best Ways to Build Good Credit

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Good credit is a necessity if you want to make your financial life easier. Good credit can help you qualify for loans and credit cards at affordable rates. And, a solid credit report might even help you lock in a lower auto insurance premium. A great credit score is the result of using some of the best ways to build good credit.

 

However, if you’ve never established credit or are attempting to rebuild after a difficult stretch you might not know where to get started. The good news is the well-established process isn’t that difficult. Here are three expert credit building tips that may help with your journey.

 

Open a credit card of some variety

 

This might seem obvious but finding a lender that’s willing to open your first credit account can be tricky. Some lenders might not be comfortable loaning you money with a limited credit history or poor credit scores. Even without a decent report, however, you might be able to qualify for certain types of credit cards.

 

  • Student credit cards are worth considering if you’re currently in school. They’re designed for people with little to no prior credit history. If you’re under 21 years of age, you might need a co-signer to open the account, unless you can prove that you have the financial means to pay the account on your own. This is a CARD Act requirement.
  • Secured credit cards are another option when you’re trying to build or rebuild your credit. With these cards you give the issuing bank a deposit when you open the account. The lender will then issue card with a credit limit equal to or otherwise very close to your deposit amount. Because there’s less risk for the card issuer banks are often willing to approve people with no credit or even damaged credit for this type of account.
  • Retail cards are the type of card issued by a bank that can only be used at a specific chain of stores. Retail store cards are usually very easy to get because their terms are inherently subprime in nature, so be mindful not to carry a balance from month to month or it can get expensive. The upside is because they are so easy to get you can easily add one to your credit reports even with limited or poor credit.

 

Note: Most credit card issuers will report your account to the three major credit bureaus, Equifax, Experian and TransUnion. You should verify this before you apply for a new account. If a new credit card is only reported to one or two of your credit reports, it won’t be as effective a credit building tool.

 

Become an authorized user  

 

Another potential method of building credit involves asking a friend or family member for help. This involves someone else adding you as an authorized user on their existing credit card account. If the card issuer reports authorized users to the three credit bureaus, it might help you establish credit history and even improve your credit scores as well.

 

Optimally you’d like to be added to an account that is old and has always been paid on time. Further, a low credit utilization ratio—that’s the relationship between a credit card’s limit and balance—is important too. If you’re added as an authorized user on a poorly managed credit card the account may damage your credit rather than help to build and improve your credit.

 

Consider a credit builder loan

 

Some credit unions and online lenders offer a credit building product called a credit builder loan. Like secured credit cards, these accounts are usually easy to open, even without a previous credit history.

 

With credit builder loans the lender holds your loan proceeds in an interest accruing account instead of releasing them to you right away, which is a considerable departure from how other loans work. You make monthly payments toward the principal and interest on your loan. As you do this the lender reports your payment history to the credit bureaus. (Pro Tip: Verify upfront that the lender reports to all three credit bureaus.)

 

Even if you already have a credit card, adding a credit builder loan to your credit reports might still be beneficial. Credit cards are revolving accounts while loans are installment accounts. Credit scoring models, like FICO and VantageScore, reward you for having a mixture of account types on your credit reports.

 

Stay on track with your payments and balances

 

Once you open a few accounts to build credit, it’s critical that you manage them responsibly. The most important rule to follow is to make every payment on time, always. This way you’ll avoid any derogatory credit reporting. It’s also important to maintain low balances relative to your credit limits. If you can add a few of these accounts to your credit reports and use them the right way, you could be well on your way to building or rebuilding your credit.

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