Best Ways to Build Credit
The Importance of Building Credit
Building and maintaining good credit is essential for achieving financial stability and security. Your credit score can impact your ability to obtain loans, credit cards, and even rent an apartment. Having good credit can also result in lower interest rates, which can save you thousands of dollars over time. Conversely, bad credit can have significant consequences, making it difficult to secure credit, and leading to higher interest rates, which can cost you a lot of money over time.
The importance of building good credit cannot be overstated. A good credit score indicates that you are a responsible borrower, making lenders more willing to offer you credit at favorable terms. A high credit score can also help you qualify for lower interest rates on mortgages, auto loans, and other credit products.
On the other hand, a low credit score can lead to higher interest rates, making it more expensive to borrow money. According to Experian, someone with a credit score of 500 can expect to pay almost four times more in interest charges over the life of a car loan than someone with a score of 700 or above. Over a lifetime having bad credit versus excellent credit can cost an average of $400,000.
5 Steps to Raise your Credit Score
Having and maintaining a high credit score is essential to being financially healthy. Here are five steps to raise your credit score:
Check your credit report:Get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) and review it for errors. Dispute any errors you find, as they can be negatively impacting your credit score.
Pay your bills on time:Payment history is one of the most significant factors that determine your credit score. Late payments can have a significant negative impact on your credit score, so make sure you pay your bills on time each month.
Keep your credit utilization low:Your credit utilization ratio is the amount of credit you’re using compared to your total available credit. Keep your credit utilization for each individual credit card below 30% to maintain a good credit score.
Apply for credit sparingly:Each time you apply for credit, it generates a hard inquiry on your credit report. Too many hard inquiries can hurt your credit score, so only apply for credit when you really need it.
Length of Credit History:Keep credit card accounts open unless you have a compelling reason to close them. The average age of all of your credit accounts makes of 15% of your overall score
Fastest Ways to Build Credit
Adding yourself as an authorized user to a family member’s or significant other’s card can reduce the amount of time it takes to generate a FICO score. It adds that card’s payment history to your credit files, and you don’t have to use or possess the credit card at all to benefit from it. But, you should come to an agreement on whether and how you’ll use the card before being added as an authorized user.
Rent-reporting services such as Rental Kharma and LevelCredit take the bills you’re already paying and put them on your credit report, helping to build a positive history of on-time payments. Some credit scores take these payments into account, which may be enough to get a loan or credit card that firmly establishes your credit history for all lenders. Experian Boost offers a way to have your cell phone and utility bills reflected in your Experian credit report.
Best Cards to Build Credit
If you’re building your credit score from scratch, you’ll likely need to start with a secured credit card. Secured credit cards are backed by a cash deposit you make upfront, and the deposit amount is usually the same as your credit limit. The minimum and maximum amount you can deposit varies by card, and many require a minimum deposit of $200. Some companies, such as Avant, Deserve, and Petal, now offer alternative credit cards that don’t require a security deposit.
The purpose of a secured card is to build your credit enough to qualify for an unsecured card — a card without a deposit and with better benefits. Choose a secured card with a low annual fee and make sure it reports payment data to all three credit bureaus (Equifax, Experian, and TransUnion). Your credit score is built using information collected in your credit reports; cards that report to all three bureaus allow you to build a more comprehensive credit history.
Another credit card for a low credit score, or if you lack credit history, is a store credit card. Store credit cards are another option for building credit. These cards are offered by retail stores. Store credit cards are easier to get approved for than traditional credit cards, but they typically come with higher interest rates and fees. You should only consider this option if you have not struggled with over spending or struggle with credit card debt due to shopping.
What to Look for When Selecting a Credit Building Card
When evaluating different credit cards, consider the following factors so you can find the best card to build credit:
Annual fees:Some secured credit cards come with annual fees, so be sure to compare the costs associated with each card.
Interest rates:Interest rates on secured credit cards are typically higher than traditional credit cards, so it’s important to consider the interest rate when selecting a card.
Credit limit:The credit limit on a secured credit card is determined by the amount of your deposit, so it’s important to select a card with a limit that meets your needs.
Reporting to credit bureaus:Not all secured credit cards report to all three major credit bureaus (Equifax, Experian, and TransUnion). Make sure the card you select reports to all three bureaus so that your credit history is accurately reported
Building good credit is crucial for financial stability and security. A high credit score can save you money over time, while a low credit score can cost you a lot of money in higher interest rates. By following these steps, you can start building good credit and achieving your financial goals. Remember, the best time to start building good credit is now!