Are you trying to establish credit right now? Establishing credit for the first time can feel impossible at times. Could you use a few tips on getting started? Alright continue reading to begin your journey to building credit.
Journey To Building Credit (for the first time)
Let’s say I have a friend – we’ll call him Austin. So, Mr. Austin is a young guy and looking to kick-off his financial future as an adult. The first thing I’d tell Austin is that Lenders do not simply hand out loans and issue credit cards out of the kindness of their hearts.
If you’ve ever walked into your bank and walked out empty handed, you know what I’m talking about. Let me be helpful by explaining how it works and throwing you and Mr. Austin a few pointers.
Here’s the thing, lenders loan money to consumers that they believe to be less risk.
What does that mean?
It’s like this, every time a lender issues a credit card or approves a loan application they are taking a financial risk. Risks such as late payments, defaulted accounts, charged off accounts and collection accounts will be a lose that the lender must eat. So to to prevent less lose, lenders depend on a system to make their decisions. This system is your credit score and report. Your credit score and report is a quick way for for lenders to navigate their risk assessment. The bottom line is, will you pay back your financial obligations?
So, if your credit report and score indicate that you are likely to pay them back on time, lenders will probably want to do business with you. What if you have no credit score or credit history?
How to Build Credit for the First Time
Even though it can be difficult to build credit for the first time, the good news is that it’s not impossible. You just have to know where to start. Here are 3 ways to build credit from scratch:
1. Secure Credit Card
Secure Credit Cards offer an easy approval process, even for someone with no prior credit history. With a secured card you will make a deposit with the card issuer equal to (or darn close to) the credit limit you will be issued. For example, you deposit $200 and the bank issues you a credit card for $200. Just be sure that the card issuer will report your account history to all three of the credit reporting agencies – Equifax, TransUnion, and Experian.
2. Credit Builder Loan (secure loan)
Many local credit unions offer small credit-builder loans as a means to help their customers establish credit history. The small loan amount is placed into a savings account and the funds are only released to you after you have paid off the loan in full (generally after 6-12 months of payments). These installment loans can be a great tool to help you establish credit for the first time and can be a smart addition to a secured credit card since the installment account will help you to add diversity in account management to your credit reports. Like the secure credit card, just make sure that the issuing bank will report the account to all three credit bureaus.
3. Authorized User Accounts
Another great strategy for building credit from scratch is to ask a family member to add you as an authorized user to their existing credit card account. Here’s how it works, when you are added to a credit card as an authorized user the account will likely show on your personal credit report. Before you proceed with this method, ask the family member’s credit card account status. What’s the recent activity? Ask about things like paid on time, low or high balance, how long they’ve had the card. Low balance, paid on time and long history will have very positive impact on your credit report and score. You see, everything on their credit card account will be “copy and pasted” to your account. The best part is that you don’t even need to be issued a card or even use the account at all. Any activity from the account owner will duplicated as yours, as long as you remain an authorized user on the account.
Absolutely every establishing credit for the first time can do at lease 1 of these methods, if that means saving $200 bucks for a deposit on your secure credit card, do it. Once you’ve establish your credit for even 3 months, there are a whole bunch of things you can do to keep your score going up.
Hopefully this blog post was inspiring to you.
With a bit of knowledge, a pinch of creativity and a handful of ambition anything is possible.
It’s always better to get started now and reap the rewards tomorrow.