Building your credit and obtaining a good credit score can be important for a variety of reasons. Most importantly, it can provide you with favorable loan terms for big ticket items including a mortgage for a home, investment property, or even a vehicle loan, or student loan refinance. This can save you thousands of dollars over the years and therefore should be a priority. Lenders use your credit score to evaluate your ability to and prior behavior as to paying bills and loans timely.
The good news is that building credit is not hard and can be done with focus on a number of key factors outlined below.
How to Build Credit Starting From Zero
Banks and financial institutions/lenders like to see that you can manage your money and pay your bills timely. To begin building credit, consider some of the following strategies.
Get a Cosigner for a Loan or Credit Card.
Having a co-signer with a positive credit history can allow you access to a loan (guaranteed by your co-signer in addition to yourself) that you might otherwise be unable to get. It can give you the start you need to building a credit history and showing you can make timely payments and manage money well.
Make your rental history count.
Ask your property management company if it reports your payments to Experian RentBureau. If it doesn’t, you can sign up for a rent payment service that works in partnership with RentBureau and have your rental payment history reported. This is a great way to add to your ability to show that you manage money well and make timely payments. This can really build your score.
Open a Secured Credit Card Through a Bank or Other Lender.
Secured credit cards are secured with a deposit you make in an amount anywhere from $500 to $10,000 or more. You basically deposit the money in advance to secure the card (ensure payment; if you fail to pay the creditor will retain your deposit in an amount to cover the deficiency and fees). This is one way for those with zero credit history to obtain a first credit card if they do not have a co-signer and have no other way to build a credit history. The downside is the tied up funds securing the card, but these are a great offering for those with no credit history and no other way to build credit. Think about whether this can benefit you long term and if so, this may be a good fit.
Tips for Building a Positive Credit History
In order to build a positive credit history and thus increase your credit score, it is very important to do the below:
- Pay your bills on time (this is a large component of your overall credit score and your way to show lenders that you will pay on time).
- Utilize any existing credit cards up to 30% and pay them off each month in full (do not carry a large balance on your cards and pay them in full each month if possible to show lenders you are responsible with credit and a good risk).
- Monitor your credit report and score (each year you can get 3 credit reports for free, one from each reporting agency at myfreecreditreport.com)
- Take out a car loan and pay it timely
- Take out a mortgage loan and pay it down faster
Do the above to build your credit score either from scratch or expand upon your existing score. Doing so can benefit you financially going forward.