Your credit history speaks volumes about your financial behavior. Lenders like to look at your credit report to determine whether you have been managing your payments effectively. Your credit report is a reflection of a number of factors including the age of your accounts, your payment history, and credit utilization ratio. These are the factors that affect your credit score. However, when you’re a new adult without a credit history, lenders do not have enough information to back their approval decision. This is most often the reason for loan rejection. But how can you build credit? By opting for personal loans or credit cards? And given that you haven’t established your credit history yet, how will you even get your first credit card or loan? The answer is simple: Start building credit as early as you can, using some of these strategies.
Most Effective Strategies to Start Building Credit
- Become an authorized user. One of the easiest ways to establish first-time credit is to become an authorized user on your parents’ credit card. If your parents use their cards responsibly and have been making timely payments, it has a positive impact on your credit history. The best part is that you don’t even have to use this card to benefit from it. Just by including your name on the account you can enjoy a growing credit score.
- Apply for a student credit card or secured credit card. These cards are specifically designed for those who have little or no credit. To get a secured credit card you have to make a cash deposit to the lender. This will act as collateral for defaulted payments if any. Similarly, you can get a student credit card that comes with attractive offers and rewards. Although the credit limit on these cards may be low, they are useful tools to establish and build credit.
- Opt for a loan. It’s definitely not a good idea to take out a loan when you don’t need one. But if you have financial needs that can be met using a loan, then this is one of the best ways to build credit. Consider small personal loans to pay for college expenses or to take care of your rent. You can choose secured personal loans, also known as credit-builder loans to build credit. For this type of loan, you pay an initial cash deposit which acts as collateral. Although the interest rates on personal loans and credit-builder loans may be high, they are very effective in helping you build credit.
- Report your timely bill payments. Your payment history contributes to a large percentage of your credit report. Therefore a positive payment history can benefit you immensely. So make all your payments on time. Whether it is your rent, or cell phone bill, or other utility bills, make sure you pay them promptly and have them reported to the credit bureaus. Timely payments reflect well on your credit and help you build a good credit history.
Most importantly, don’t be intimidated by the credit-building process. Bear in mind that it takes time, and you’re not alone. Everyone has to start somewhere. Some opt for personal loans or secured loans and others for credit cards. But what matters is whether you are responsible for your credit-building journey. And if you are, nothing can stop your credit from improving.