How Do You Establish Credit?
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Establishing credit is important. Using credit over time creates a credit history (hopefully of on-time payments) that businesses use to decide if they will give you credit. Without a credit history, companies may be hesitant to give you credit because they are unsure if you will pay them back.
This may mean paying a higher interest rate, having to pay a security deposit or even being denied loans for homes or cars.
The following are five ways you can establish credit.
Get a credit card
BE CAREFUL! Most people tend to spend more with credit cards. Credit cards can give you a false sense that you have more money to spend than you actually have.
If you get a credit card to establish credit, consider the following suggestions:
- Set-up automatic payments, so you don’t get a ding on your credit report for a forgotten late payment.
- Only use your credit card to pay small bills with predictable monthly payments, like a cellphone or cable bill. Pay the credit card balance off monthly.
- Do not spend more than 30% of your credit limit. How much of your overall credit limit you use can affect your overall credit score.
Get a secured credit card
If you do not qualify for a traditional credit card (unsecured credit card), you can get a secured credit card instead. A secured credit card requires a deposit. That deposit is typically your credit card limit. Similar to an unsecured card, the rule of thumb is to only use 30% of your credit limit. Ask your creditor if they will report your payments to the credit bureaus. Not all secure credit card companies report to credit bureaus.
Pay your student loans consistently
Your student loan servicer reports your loan information to credit bureaus. If you cannot afford your payments, loan providers, particularly federal loan providers, offer several options to help make your payment more affordable.
Auto installment loan
Use the 20/4/10 as a rule of thumb so you don’t get a car you can’t afford.
- Make a 20% down payment
- Finance the car for no more than four years
- The total cost of a car shouldn’t exceed 10% of your income (car loan payment, insurance, fuel, warranties, and average monthly maintenance costs)
- If you cannot keep your costs to 10% of your monthly income, commit to choosing a vehicle as close to 10% of your monthly income as possible
Become an authorized user on someone else’s credit card
Ask your parents (assuming they have good credit) to make you an authorized user on their credit card. An authorized user can use another person’s credit card in their name. The primary account holder adds the authorized user to their credit card account.
An authorizer user benefits from having the primary account holder’s credit payment history reported on the authorized user’s credit report. As the primary account holder makes on-time payments, it may help you establish a good credit history.
A word of caution: If the primary account holder does not pay their bills, the late payments will be reported on your credit report. In most cases, you will not be responsible for the credit card bill.
The bottom line
Establishing credit means using good credit habits, like paying your bills on time, over time to have a good credit score. As you work to establish credit, remember to use credit wisely so your hard work will help and not hurt your credit in the future.
This series on building credit is brought to you in partnership with United for Financial Health powered by Experian. Sign up for SaverLife to earn points and enter to win cash prizes for reading about credit and taking quizzes to test your knowledge.