When was the last time you checked your credit score? If you don’t have a lengthy credit history, checking your score may not be one of your priorities, but it should be. Keeping track of your progress is important.
Calculating your credit score may be complex, and it has an immense impact on your ability to secure a loan, as lenders typically consider your credit score before approving or denying a loan you’ve applied for.
If you have a good credit score, you’re generally more likely to be approved for private student loans, a car, or even a house. A poor credit score signals that you may be unable to pay back the money you’re loaned.
If you’ve never used credit, or if you have in the past but haven’t touched your lines of credit in years, you may not have a credit score at all. A lack of credit history will not result in a low credit score. Instead, you won’t have a score until you have a credit history for your score to reflect.
Fortunately, you can take several steps to build your credit history. Here are a few responsible ways to start establishing credit.
While utility companies and phone service providers don’t have to report your payments, if paid using a credit card, they could help you build your credit history.
If you can pay your balance fully and on time, using your credit card for these minor purchases can help build your credibility with potential lenders. It shows that you’re able to use your card responsibly and helps you develop and demonstrate a habit of making on-time payments.
Whether this strategy is a good option for you depends on whether your utility or cell phone company charges a fee when you use a credit card to pay your bill. You’ll want to avoid this method if using your credit card to pay will raise the cost.
If you don’t have your own established credit history, becoming an authorized user on a family member’s credit card is a great way to build your own credit. This gives you the ability to use and make payments on the account. The account is added to your credit report and, as a result, your score reflects the payment status of the account.
Since your family member’s payment history appears on your credit report, and vice versa, it’s important that you choose a responsible family member who understands the importance of making their payments on time and that you commit to responsible use of the account so you don’t damage their credit, either.
To help build a solid foundation for your credit, use credit cards responsibly by making full payments on a limited number of cards.
Amount owed on debts accounts for 30% of your credit score, which means it’s important to maintain low balances on your credit cards. If you carry a balance on your credit card(s), not only can your credit be negatively impacted, but you’ll also accrue interest over time, adding to your debt. The more you allow this to happen, the harder your debt may become to manage.
Additionally, it’s important to not open too many cards at once. Rapidly applying for more credit can make potential lenders hesitant to lend to you. This is because you don’t have a payment history established on these cards to prove that you can manage the payments.
Applying for a credit card without credit history can create an issue. After all, a credit card is the most efficient way to build or improve credit, but many lenders will reject applications that lack good credit history. If you find yourself in this situation, a secured credit card can be a good solution.
A secured credit card allows you to pledge funds as security. These cards require a cash deposit that usually equals your credit limit. After you prove that you can make your payments in full and on time, your lender may offer you an unsecured card with a higher credit limit.
Whatever credit card you choose, make sure you’re informed about the benefits and costs of the option you select. Understanding how credit cards work and knowing your unique needs are both essential to choosing the right card.
Another way to build credit with no credit history is to have someone you trust co-sign on a credit card application. When a parent or another responsible adult with a good credit history co-signs on a card, they’re promising to take care of any payment problems that may arise with the card. If someone with a good credit score agrees to co-sign, lenders are more likely to accept your application, allowing you to open the credit card account and begin using it to establish credit.
Your employment status doesn’t directly affect your credit score. However, getting a job can provide you with a steady income that enables you to make payments on your credit cards, loans, and other debts. Prompt, full payments make a positive impact on your credit history.
Additionally, lenders may ask for income information in addition to checking your credit. Proving that you have steady employment can help demonstrate to lenders that you’re safe to lend to and may make it easier for you to be approved for credit.
When you understand how credit works, you can make informed decisions that help you build credit and improve your financial well-being.
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