One marker of adulthood is when someone first asks to check your credit. From purchasing a new cell phone to buying your first home, your credit score plays a big role in your financial life. Your credit report is used by businesses and lenders to establish how much you’re able to borrow, and often determines your interest rates as well.
Basically, your credit score indicates to lenders your level of risk as a borrower. Your credit score is based on how you’ve managed your debt in the past. A long history of responsibly managed debt and on-time payments means that you likely have a good credit score. However, if you don’t have any credit history or maybe you’ve missed a few payments, you may have a hard time getting approved for a new account with favorable terms.
Building credit can take some time, but it’s definitely worth the effort. Maybe you don’t expect to apply for credit any time soon — great! It’s still essential to start building now, that way you’re ready with a nice and shiny credit score when you do need it.
Read on to get a rundown of the different ways to build credit and how they work.
Get a secured credit card
This is a good option if you don’t have any credit history to speak of. A secured card is when you make a cash deposit upfront, which is usually the same amount as your credit limit. The minimum and maximum amounts vary depending on which credit card you choose. Many options have a $200 deposit minimum requirement. Once you close the account, you’ll get your deposit back.
Secured credit cards aren’t meant to be a permanent mainstay in your wallet. The idea is that you use them just like any other credit card: make small purchases, and be sure to pay your balance in full each month. This will show lenders that you’re a responsible borrower as you build a history of on-time payments. You do this until you’ve built enough credit to qualify for an unsecured credit card (cards without a deposit requirement and generally better benefits).
If you go this route, be sure to choose a secured credit card with a low annual fee. This enables you to build a more comprehensive credit history.
Become an authorized user
If you have a significant other or close family member, they may be willing to add you as an authorized user on their credit card. This adds the card’s payment history to your credit report, so ideally you’ll want the primary user to have a significant history of on-time payments. Being added as an authorized user can reduce the amount of time it takes to generate a credit score.
Keep in mind that you don’t have to use (or even physically possess) the card at all in order to reap the benefits of being an authorized user. Before being added as an authorized user, you’ll want to reach an agreement with the primary cardholder on the ways in which you’ll use the card (if at all).
Get a credit-builder loan
The aptly named credit-builder loan is meant to help individuals build credit. With credit-builder loans, the money you borrow is held by the lender in an account and not released to you until the loan is repaid, and your payments are reported to credit bureaus. Think of it as a sort of enforced savings account. These types of loans are typically offered by a bank or credit union.
Get a co-signer
This is another option if you’re unable to get an unsecured credit card on your own. You’ll want to ensure that you and your co-signer understand that as a co-signer, they’re liable for the full amount owed if you fail to repay.
Have your monthly bills added to your credit report
If you have a history of paying bills on time, that can be used to your advantage. Things like your cell phone or utility bills don’t automatically help you build your credit score, but there are ways to change that. For example, through Experian, you can request to have these bills added to your credit report. This allows Experian to connect to your bank account and add on-time payments for phone, utility, and streaming services bills to your credit report, and therefore they’re reflected in your credit score.
There are also rent-reporting services that do this same practice with your monthly rent bill as well. Just keep in mind that not all credit bureaus take these payments into account, but the ones that do may be enough to secure you that loan or credit card that’ll help you build your credit even further.
Keep an eye on your score
It takes some time to earn a good credit score, and requires a history of on-time payments. Practice good credit habits like making on-time payments, keeping your credit utilization low, and avoid applying for multiple credit cards within a short period of time.
Once you’ve practiced these habits for a while, take a peek at your credit report by utilizing your annual free credit report through AnnualCreditReport.com.