Establishing credit helps build financial stability and increase credit scores.
If you have no credit history, there are several easy steps you can take to establish and build positive credit.
There is a misconception that no credit is better than poor credit. This is 100% not true. Not having any credit may result in you not having a credit score at all.
However, establishing credit from scratch requires some time and a little afford.
Here are 7 easy steps to help you establish credit:
1. Open a Secured Credit Card
A secured credit card will report on your credit reports like any other revolving account with a balance, credit limit, and payment history. It will help you to build a positive payment history, establish a credit utilization, and build out your length of credit.
2. Alternative Revolving Account
If you don’t qualify for a secured credit card due to past mistakes or credit issues you may want to open up a credit card with Self Lender from Lead Bank. There’s usually no credit check and your payment history will be reported to all 3 credit bureaus.
3. Keep Your Revolving Utilization Low
Now that you have a credit card it’s important that you use your credit but, keep your credit utilization as low as possible. Shoot for a 20% utilization on your credit card so that you can get the most out of your credit scores.
4. Pay Your Bills On-Time
Now that you have a credit card it’s important to make sure that you pay it on-time EVERY MONTH. Remember, you’re building a foundation on top of which the rest of your credit will sit for many years to come. It’s important that this foundation be strong and have a perfect payment history. Don’t overextend yourself and pay your bills on-time every month.
5. Open an Installment Account
According to FICO, xix of credit accounts for approximately 10% of your credit scores, so it’s important to establish both revolving and installment accounts. Installment accounts are accounts that have a set length of term such as auto loans, mortgages, student loans, etc…. If you don’t have any installment loans it’s important that you establish a small one to build out your credit history. Talk to your local bank or Credit Union about secured installment loans, Self Lender has short term installment loans to help build credit as well.
And like your secured credit card, make sure that you pay your bills on-time every month.
6. Limit Your Inquiries
Inquiries are an inevitable part of life when you’re establishing credit but, don’t overdo it. Inquiries account for approximately 10% of your FICO Credit Scores so it’s important to limit yourself to as few inquiries as possible. You’re going to have an inquiry for your secured credit card and installment loan but, don’t start applying for ultra-prime credit cards with miles, points, and cashback that you won’t be able to get approved for yet. You need to build your credit slowly, limit your inquiries, and establish a long length of positive credit before you’re ready for those types of cards. You have to learn to walk before you run, jump and eventually fly.
7. Piggy-Back on Someone Else’s Credit
There’s a little loophole called piggy-backing which may allow you to establish and build out your credit a little faster. If a friend or relative adds you as an Authorized User to their already established credit card, the entire account will report in your credit report with the full payment history. So if someone adds you to a 20-year-old credit card with a $30,000 credit limit, 5% utilization, and a perfect payment history – the entire account will report on your credit report as yours.
This will immediately bring up your credit scores and possibly allow you to qualify for a regular credit card, instead of a secured one. An authorized user account may be a great way to jumpstart your credit but, the account can be removed as easily as it was put on. Don’t look at it as a permanent fix though, you will want to establish your own credit so that you can be in control of your own destiny and not have to rely on anyone else.
If you find someone kind enough to help you by adding you as an authorized user on their cards, be appreciative but, also use this opportunity to establish your own accounts so that you can be self-reliant.
BONUS: If you have past delinquencies on your credit reports that are hurting your scores and not allowing you to properly establish credit, you should consider working on repairing your credit.