How to Start Building Your Credit Rating Now
Building your credit score right now does not have to be complicated. With a few strategic steps, you can gradually improve your financial profile and become more attractive to lenders. Let's take a look at some effective methods to get your credit building journey started.
1. Secured Credit Card
One of the most straightforward ways to start building your credit is by obtaining a secured credit card. This type of card is backed by cash you deposit in a Certificate of Deposit (CD), which acts as collateral for your spending limit. Since your money is held by the bank, the bank assumes no risk. You can use the card just like any other credit card, making purchases and paying off your balance monthly to avoid interest.
Please note that a secured credit card should not be used indefinitely. The goal is to use it long enough to apply for an unsecured card, which will offer higher credit limits and no collateral.
2. Credit-Builder Loan
Another option is a credit-builder loan, which can be issued by a third party, such as a bank. This loan goes into a savings account where your initial deposit is held. Once you repay the loan, you get your initial deposit back. Think of this as a “forced savings plan” that can help build your credit. Typically, you can see a 35-point improvement within six months. However, it's essential to ensure that you make all payments on time, as missed payments can significantly harm your credit score.
3. Getting a Co-Signer
Getting a co-signer is another method to improve your credit. A co-signer is equally responsible for the debt and can significantly boost your chances of getting approved for credit. However, be cautious, as missed payments can harm both your co-signer and your credit score. This method carries some risk to your relationships, so it should be used wisely.
4. Becoming an Authorized User on Someone Else’s Card
Another approach is to become an authorized user on someone else's credit card. By doing so, you can piggyback on their established credit history without having to pay the debt yourself. This method can be particularly useful if your parents or another trusted individual allows you to be an authorized user on their card.
Note that simply adding you as an authorized user does not give you access to the card. The act of being an authorized user, however, can positively influence your credit score.
Easiest Way to Get Started: Get a Credit Card
The easiest and most immediate way to start is to get a credit card. Students often have access to specific credit cards designed for them, such as the Discover it and Capital One Journey cards. These cards offer unique features that can help you build credit responsibly. The key is to avoid falling into debt, as that would defeat the purpose of building credit. Charge a few things each month and pay off your entire balance when the statement is due. Carrying a balance benefits no one.
Additional Methods
Other ways to build credit include opening utility or phone bills under your name. These payment methods can help you secure a lease or other credit-requiring accounts if your ultimate goal is to live independently. Remember, the most important factor is to avoid paying any interest. Always strive to pay the full balance on your bills to maintain a healthy credit score.
Starting your credit building journey now can have significant long-term benefits. By taking steps to improve your credit rating, you can gain access to better financial opportunities, lower interest rates, and stronger financial stability in the future. With patience and consistent effort, you can achieve a higher credit score and a more promising financial future.