How Do I Start Building Credit?
If you want to qualify for a loan to buy a house, a car, or another expensive product or experience, you need credit.
The world of credit, credit reports, and credit scores can seem intimidating—especially if you are just starting out—but you can start building credit right now and work towards funding your financial dreams with these tips.
What Is Credit?
Credit is the ability to borrow money and pay it back later with interest. Interest is the sum a borrower pays their lender, usually a percentage of the amount loaned. That is called the principle.
Two common examples of credit are credit cards and loans, such as mortgages and auto loans.
Your ability to receive credit is based on your credit score, determined by your credit report. Most lenders look at your FICO score, a specific type of credit score, when deciding whether or not to lend you money. Your credit score tells lenders how reliable you are to pay off loans and also impacts potential employment, housing, insurance rates, and more.
Unsure what your credit score is? You can find it quickly, easily, and for free at annualcreditreport.com. Credit Union 1 is not affiliated with Annual Credit Report.com.
To raise your credit score, you need to build a credit history to prove that you are a reliable borrower.
How Do I Build Credit?
1. Get a Secured Credit Card
A secured credit card is backed by collateral from the borrower.
Collateral is something a borrower gives their lender as security to ensure that the loan will be paid off. If it is not, the borrower loses their collateral. This makes it more likely that the loan will be paid off and offsets the risk the lender takes by loaning money to someone with a lower credit score. Collateral may be a cash deposit, called a liquid asset, but can also be what is known as a physical asset like vehicles and property.
For secured credit cards, the borrower needs to provide a cash deposit as collateral for the card, which becomes the limit to their card’s credit.
For example, if you deposited $200 as collateral on a secured credit card, you would have a spending limit of $200. If you wanted to keep using this card, you would have to make a payment. You could choose to deposit more money, and raise your credit limit, at any point.
Some companies periodically review the payment history of their secured card holders and can choose to turn their cards into regular credit cards if the borrower has a history of regular payments.
If you can afford the minimum deposit on a secured credit card, it can help you establish a credit history.
There are a few important things to remember about secured credit cards:
- If you get a secured credit card to build credit, be sure to pay your required payments on time every month. Your payment history is 35 percent of your FICO score.
- If you can, pay your card’s balance in full every month too, because the percentage of your available credit that you use, known as your credit utilization, also impacts your credit score. Credit utilization is 30 percent of your FICO score. Plus, having a leftover balance allows interest to build up, since interest is calculated using how much you still owe your lender.
Looking for a secured credit card? Credit Union 1 offers two secured Visa® credit cards with great rates and exclusive rewards.
2. Become an Authorized User of a Credit Card
If you are having trouble qualifying for credit cards—or want some experience before jumping in with your own card—consider becoming an authorized user on a family member’s or significant other’s credit card.
An authorized user is permitted to use someone else’s credit card, and the card’s payment history is added to the authorized user’s credit history. If payments are made on time, and credit utilization is kept in check, this should increase the authorized user’s credit score.
- Check if the card’s issuer reports authorized user activity to the credit bureaus (otherwise, being an authorized user will not build your credit).
- Also, make sure you have an agreed-upon deal with the cardholder about how this credit card’s balance will be paid off. This will prevent conflict when the credit card statement arrives.
3. Get Credit from Your Existing Bills
Receiving credit from the bills you already pay is a painless way to start building your credit history.
With Experian Boost, you can raise your credit score instantly by getting credit for your current bills such as:
- Internet, cable, and cellular coverage
- And more.
Once you connect your bank accounts to the Experian Boost website, you can choose which bills to apply towards your credit score and instantly see exactly how many points your credit score has improved by (Credit Union 1 is not associated with Experian Boost).
Additionally, you can ask your landlord if they report your rent payments to the credit bureaus. If your landlord does not already, they will likely agree to do this for you. On the off-chance your landlord refuses, you can use a website such as Rental Kharma to do it yourself (Credit Union 1 is not affiliated with Rental Kharma). With the Love My Credit Union Rewards program, Credit Union 1 members save up to 30% on Rental Kharma.
4. Get a Secured Loan
Similar to a secured credit card, a secured loan requires a borrower to put down collateral to borrow funds. If a secured loan is used to purchase an asset like a house or vehicle, the asset itself usually services as collateral.
Secured loans are a common alternative for borrowers whose credit scores are not high enough to qualify for unsecured loans (loans without collateral).
If you want to use a secured loan for a major purchase, consider Credit Union 1.
5. Have a Mix of Credit Types
It is important to show lenders that you can handle a variety of credit options. In fact, your credit mix makes up 10 percent of your FICO score. Plus, being able to use different credit options can help keep your credit utilization low, because you have more credit to pull from before you reach your limits. If you can, work to have a mix of credit.
For example, take out a secured loan and open a secured credit card. These two low-risk options can help improve your credit score by diversifying your credit portfolio.
On top of competitive loan rates and credit card perks, Credit Union 1 secured loans and credit cards come with the support of team members who are dedicated to helping you build your credit history.