Table of Contents Hide
- How to Build Credit with Credit Card
- How to Build Credit without a Credit Card
- How to Build Credit Fast
Building credit to make purchases such as a cellphone, car, or even house is necessary without cash at hand. It’s difficult to get a loan or credit card if you don’t have a good credit history or no credit history and score at all. It’s even hard most times to get an apartment without a good or no credit history. Businesses use your credit history and score to evaluate your creditworthiness and establish your borrowing terms.
A credit score depicts how you have used credit in the past and helps lenders know the level of risk they are taking borrowing you money. They’re 5 key factors that affect your credit score. Lenders use your past credit behavior as seen in your credit report to forecast your future credit behavior. This is one major reason you need to know how to build your credit.
If you have a long credit history of making payments on time, staying below your credit limit, and managing debt responsibly, you’re likely to have a good credit score. This can make you secure favorable terms and a low-interest rate.
On the other hand, if you have little or no credit history or bad credit history and score, the lender will take it that you’re inexperienced in handling debts and a huge risk. You will find it difficult to have a new account approved. Even if you’re approved, you’re very likely to get less favorable terms, low credit limits, and higher interest rates.
With this said, it’s important to build your credit. Let’s quickly dive into the subject matter of how to build credit. In this article, we will be talking about how to build your credit with a credit card, without a credit card, and how to establish credit when you have no credit history.
How to Build Credit with Credit Card
Building credit with a credit card is one of the easiest and fastest ways to build your credit. It is one of the best credit-building tools and the most held form of credit.
Using credit cards to pay bills or buy groceries, and paying off your balances on time each month can help build your credit as it proves that you can responsibly manage debt.
If your aim is to build credit using a credit card, here are 3 strategies for you
- Get a secured credit card
- Be an authorized user
- Request for credit limit increase
Get a Secured Credit Card
Building credit from scratch? Get a secured credit card. If you have poor or no credit history, credit cards available to you will be limited.
A secured credit card works just like a regular credit card, just that a security deposit is required to get a secured card. This security deposit serves as collateral and is usually equal to your credit limit.
Secured credit card usually have minimum and maximum credit limit which varies across different card issuers. This card is not meant to be used forever rather for the short period you should use it to build your credit score to qualify for a regular card.
In a case where you default in your payment, the lender can use your security deposit to cover your debt. When you get a secured credit card, use it to pay for your groceries and other small everyday item and make sure you pay off your debt on time. With time this will contribute to your payment history, which can help boost your credit score.
You will want to consider choosing a secured credit card with a low annual fee and reports your payment data to all three credit bureaus, Equifax, Experian, and TransUnion.
Be an Authorized User
If you have issues qualifying for a credit of your own, becoming an authorized user would be a great option for you. You may ask a family member or a significant other to be an authorized user in their credit card. By doing so, the card’s payment history is added to your credit files. So you will want a primary user with good credit history.
You don’t need to possess nor use the credit card to benefit from being an authorized user. Ensure to verify from the primary cardholder that the card issuer reports authorized user credit activities to the credit bureaus. Generally, credit card issuers do report authorized user credit activities but then you will want to make sure otherwise your efforts will be wasted.
You will have to reach an agreement with the primary cardholder as to whether and how you will use the card and how the annual fees and any other fees will be shared.
However, the degree to which this can help your creditworthiness is limited since you’re not the one responsible for managing the card and making payments.
Request a Credit Limit Increase
This is one of the simple and fastest ways to build your credit using a credit card if you’re a responsible cardholder. Let me show you how.
If you already have a credit card, here are ways you can ensure you’re getting the most credit benefit off your card. First, you use the card for your day-to-day and other essential bills and make sure you pay off your balances each month and on time too. This will make the lender know you’re a good risk – a responsible cardholder.
After several months of using your credit card responsibly, you can apply for a credit limit increase. This can help increase your credit utilization ratio – the percentage of your balance to your total credit limit. Your credit utilization ratio is one of the most influential factors that affect your credit score. It is advisable that you keep your credit utilization ratio lower than 30%.
Although a 30% credit utilization ratio is a good starting point, you should keep it lower than that. The simple principle of credit utilization ratio is the lower your credit utilization ratio, the better. Low credit utilization builds your credit score. Lenders wouldn’t approve a credit limit increase for you if you have large balances or have a record of paying late. You should pay off your balances each month and on time.
How to Build Credit without a Credit Card
While building your credit with a credit card is good, it is not the only option to build your credit. Since your credit score is a reflection of how well you’ve managed debt in the past, any credit accounts you have that are reported to credit bureaus in good standing can help boost your credit score.
You might want to consider a secured loan, credit-builder loan, or co-signed loan. There are ways also which can use to build credit using rent, phone, and utility payments. Some of these ways are free, others are not, they carry a fee.
Below are 5 strategies that can help you build your credit without a credit card even if you are starting out and don’t have any credit accounts.
- Apply for installment loans
- Ensure your monthly bills are added to your credit report
- Pay all your existing loans diligently
- Get a credit builder loan product or a secured loan
- Use a co-signer
Apply for Installment loans
Installment loans can boost your credit score. If you have little or no credit history, an installment loan, which you pay back through set monthly payments, could help you build your score.
Mortgage, auto, personal and student loans are all types of installment credit. This implies that the loan you might borrow to pay for your education or buy a car can help you build credit, provided you make all your payments on time. You shouldn’t take out a traditional loan just to build your credit. Instead, there are credit-builder loans that work differently and are intended for precisely the purpose of credit building.
Ensure Your Monthly Bills are added to Your Credit Report
Bills like your cellphone and utility bills won’t automatically help you build your credit score even when you may have a long history of paying bills on time. These bills can be added to your credit report by using Experian Boost™†.
Boost allows Experian to connect to your bank account and add on-time payments for phone, utility, and streaming service bills to your credit report so they can be reflected in your FICO® Score☉ powered by Experian instantly. Your monthly rent payment can also be reported to Experian when you make use of Experian RentBureau.
Pay all your existing loans diligently
Your payment history is the most important aspect of your credit score. So attend to your existing debt. Ensure you make all your payments in full and on time to maintain a good payment history.
Another factor in your scores is the progress you’ve made on paying down your existing loans. Getting loan balances closer to zero indicates to lenders that you’re able to repay your debts and you’re a good risk.
Get a Credit Builder Product or Loan
As the name implies, a credit builder loan is a loan whose sole purpose is to help build credit
When you apply for a credit-builder loan, the money you borrow is being held by the lender in an account and not released to you until you repay the loan. It’s a kind of forced saving program and your payments are reported to the credit bureaus.
You can ask about a secured loan for credit building from your bank or credit union if you have money on deposit with them. With these, the money in your account or certificate of deposit acts as the collateral.
The interest rate you’re earning on your deposits is typically a bit lower than the interest that comes with the loan.
Use a co-signer
Another option to get a loan or an unsecured credit card is using a co-signer. But ensure that you and the co-signer reach an agreement or understanding that in the case that you default to pay, the co-signer is on the hook for the full amount owed.
How to Build Credit Fast
Building a credit score is not a day’s job. In the sense that it takes time and history of on-time payment and generally responsible card management. But let’s show you strategies that can help you build your credit score pretty fast.
To have a FICO score, it is required of you to have at least one account that’s been open six months or longer and at least a creditor reporting your credit activities to the credit bureaus in the past six months. FICO’s biggest competitor, VantageScore can be generated more quickly.
Practice these strategies stated below to build your credit fast in the order of importance
- Maintain a good bill payment history
- Keep your credit utilization low, if you use credit cards
- Avoid applying for multiple credit accounts close together
- Keep credit card accounts open
Maintain a good bill payment history
Paying off your balances on time every time is the most important factor that builds your credit score whether credit card or loan payment. It contributes 35% of your total credit score. So if you really want to build a high credit score, you have to have a good bill payment history. And to that, you have to always pay your balances on time. If you can always pay your minimum balance on time, that’s good. But if you can pay more than the minimum and on time, that will be very useful to your credit score.
Keep your credit utilization low, if you use credit cards
Credit utilization is the second most important factor that affects your credit score. And the principle is simple- The lower your credit utilization, the higher your credit score. We recommend keeping your credit utilization below 30% on all cards when possible. If you can keep it below 20% better.
Avoid applying for multiple accounts close together
When you apply for a new credit account, it causes a temporary drop in your credit score. Applying for multiple credit accounts within a short time space can cause significant damage to your credit score. We recommend that you space your applications by about 6 months minimum. Alphawallstreet also recommends the best credit cards for your needs before you apply.
Keep your credit card accounts open
Consider keeping your credit card accounts open unless you have a compelling reason to do so like a high annual rate and low customer service amongst others.
You can also explore transferring your credit limit to another card or downgrading it. Closing an account can hurt your credit utilization and reduce the length of your credit history (average account age).
Building a high credit score can be a hell of a task for a lot of people. In this article, we have made everything simplified and in a detailed manner for our readers and clients to understand very well.
On-time payments and credit utilization determine about 65% of your credit score while others make up the remaining percentage. You have to work on these areas to build your credit score pretty fast.
Leave feedback if you find this article useful or not.