Building credit isn’t as easy as it used to be. Still, there are tricks to help you get started.
Thanks to the CARD Act of 2009, safeguards are in place to keep young people from opening accounts before they understand the risk and responsibilities associated with spending on credit. While those limits have likely spared many from credit card debt early in their adult life, the same regulations have made it difficult to establish credit as a young person.
When I started my first job out of college, I held two debit cards and a credit card through my banking institution. The credit card had a fairly low limit but was my first line of credit. I had a hard time obtaining it because I didn’t have a credit history and hadn’t established any credit.
A few months into my job, I took my first business trip. I didn’t have a company card yet, so I had to reserve my hotel and rental car on my own cards. The only problem? My personal card’s limit wasn’t high enough to carry both the rental car deposit and the cost of my hotel. While the situation was easily resolved, it would have been handy to have a card with a higher limit.
Don’t wait until you need it: Start building credit now. Try these methods to jump start your credit journey.
Become an Authorized User
One of the fastest and easiest ways to build credit is to be added as an authorized user on a parent or sibiling’s credit card. Certain credit card companies report authorized users to the three major credit bureaus. This way, you can build credit without being the primary cardholder.
If you take this route, there are a few things to consider. Firstly, make sure the card you’ll be authorized on has a history of being paid in full and on time. It won’t help your credit if you’re added to the card that your sister only pays the monthly minimum on.
Second, research to find if the credit card company is one that reports authorized users on credit reports. Lastly, reach an agreement with the account holder about whether or not you’ll actually put purchases on the card and, if so, how and when you’ll pay them off.
Ask Your Bank
Many banks offer credit cards tied to your checking or savings account. This is one form of a secured credit card, which requires a deposit to open. Though it’s tied to your bank, it isn’t a debit card.
When it comes to debit cards vs. credit cards, the two are not created equal. Debit cards withdraw money directly from your bank account and pass it to the businesses you buy from. Credit cards allow you to borrow money from a credit institution with the agreement that you’ll pay it back, ideally monthly when you receive a statement. A debit card doesn’t build credit.
Count Your Bills For Credit
It’s a common misconception that paying your bills on-time automatically builds your credit. Rarely are those counted towards your credit score. However, tools exist to make this possible.
In 2019 Experian debuted Experian Boost, a service that counts utility and phone bill payments towards your credit score. Only payments made on time and with your bank account are eligible. The boost only affects your credit score reported by Experian.
Additionally, a variety of free and paid services will report your rent payments to credit bureaus. This isn’t a surefire way to build your score, but it’s worth considering. If you’re already paying these bills, they could be doing more for you. You can use appointment software to make sure billing is done correctly so there are no credit surprises.
Take Out A Credit-Builder Loan
If you don’t feel ready for the responsibility and risk associated with a credit card, a credit-builder loan is a good route to pursue. Unlike a traditional loan, a credit-builder loan allows you to pay money to a lender, and then the lender reports your payments to the credit bureaus.
But this isn’t just paying to build credit: The money you pay monthly gets held in a savings account until the end of your loan term. Think of it as a way to help you save and build your credit at the same time.
There may be interest and fees associated with the loan as well as an application process. Do your research to decide which lender, amount, and timeline is best for you.
With credit-builder loans as well as credit cards, keep the account active for as long as you can. A longstanding line of credit with an account in good standing improves your score and helps you look reliable to potential lenders.
No matter how you choose to build your credit, make sure you know what you’re signing up for. Damage to your credit score can take years to recover from.