4 Fast Ways to Build Your Credit
Tens of millions of adults in the United States have no credit history with any of the three national credit bureaus. The Consumer Financial Protection Bureau put this number at 26 million in 2015. If you’re one of these “credit invisibles,” you’ll struggle to qualify for auto loans, mortgages or even most credit cards until you build up a credit history. That’s why it pays to know how to build credit fast.
You can build up a credit history by taking such steps as applying for and using credit cards responsibly and paying off auto, student or other loans. You won’t be able to build that credit history overnight. But you can do it as quickly as possible by taking the following four steps:
1. Apply for a secured credit card
You might not qualify for a traditional credit card if you don’t have any credit history. But you can probably qualify for a secured card, one with a spending limit tied to a deposit that you make. If you get one of these cards, use it each month and then pay off your balance in full by each due date, you’ll gradually build up a record of on-time payments. Such payments will build a credit history.
When you qualify for a secured credit card, you also deposit money into a separate account with the bank behind the card. The money you deposit becomes your spending limit. If you deposit $600 with the bank, your card’s spending limit will be $600. The bank will also use the money in your account to pay your credit-card bill if you fail to pay on time.
The more you use your secured card, , something that will steadily grow your credit history. Just make sure to always pay your credit-card bill on time. And pay that balance off in full each month so that you can avoid having to pay interest.
2. Find a co-signer and make your auto loan payments on time
Do you need a car? This a great opportunity to build your credit. If you take out a car loan to purchase a vehicle and pay it back on time each month, you’ll again establish a record of on-time payments that will help you build a credit history and a solid three-digit credit score.
You might struggle to qualify for a car loan if you don’t have a credit history. You can, though, sign up for an auto loan with a co-signer, usually a family member. The co-signer signs onto your loan just like you, and agrees to take responsibility for the loan if you fail to make your payments. With the added security of a co-signer, auto lenders are far more likely to approve you, without a credit history, for a loan.
Again, make those payments on time each month. Paying 30 days or more late will send your credit score tumbling, and will build not just a credit history, but a bad one. Also, you’ll put your co-signers on the hook for your bad financial behavior. If you don’t make your payments, your co-signers will have to do it on your behalf.
3. Pay your student loans on time
You might dread paying back your student loans. But there is a benefit: Your student-loan payments are reported to the credit bureaus. If you pay these loans back on time each month, then, you’ll again build a positive record of making your payments on time.
The usual caveats apply, though: If you miss a payment by 30 days or more, your credit history will get a negative mark that will remain on your credit reports for seven years.
4. Take out a credit-builder loan
Not all banks offer them, but a credit-builder loan is one way to build a credit history. In fact, that’s the main purpose of these loans, as their name suggests.
You’ll borrow a small amount of money, maybe $500 to $1,000, with a bank or credit union. You’ll also agree to pay this amount back in a certain number of months, usually 12 to 24. The financial institution lending you the money will deposit it into a savings account or certificate of deposit that earns interest.
Once you pay back the loan in full, you’ll get your money back plus any interest it earned. So you’ll be establishing a payment history, and building your credit, while earning at least a bit of money.
A few tips on what not to do
The above steps will help you build a credit history. But there are some costly mistakes you should avoid to make sure you’re not building a negative credit history. Here are three to watch out for:
- Don’t pay your bills late – Payments that are 30 days or more late on credit cards and loans will show up on your credit reports, where they’ll stay for seven years. These late payments will send your three-digit FICO credit score tumbling and give financial institutions reason to reject your applications for credit cards and loans.
- Don’t use credit irresponsibly – If you do qualify for a credit card, use it responsibly. Don’t rack up thousands of dollars of debt that you can’t pay off. The more of your available credit that you use, the more you’ll drag down your credit score.
- Never let a bill go into collection – If you do, even bills that aren’t generally reported to the credit bureaus—such as medical bills and utility bills—will hurt your credit score.
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