03/18/2018
Before you apply for a mortgage, establish and learn how to build credit. Just follow these easy steps.
You canât establish credit or get a credit score until you use a credit card or take out a loanâbut itâs almost impossible to get a credit card or a loan without already having credit. Welcome to the dilemma of how to build credit.
Interested in getting a mortgage loan? You need to crawl before you run, so youâll have to prove youâre responsible enough to handle a small amount of credit first. You start life with no credit at all, so first youâll need to establish credit, and then you can start to build it. And if youâve already established credit, but need to improve your credit score, weâve got you covered.
What does it mean to build credit?
Before lenders give you credit or loan you money, they need some proof that youâre financially responsible. Building credit is the process of creating a documented history of how youâve handled credit.
How to Build Your Credit
1. Enlist the help of family.
Ask to be added to a parentâs credit card as an authorized user. (Being linked to someone with bad credit doesnât help, so be choosy.) If your family member agrees, youâll get a credit card with your name on it that you can use, but you wonât be the primary cardholder.
Note that being an authorized user to build credit works only if the credit card issuer reports authorized users to the credit bureaus. If it doesnât, you wonât be building and establishing credit, so find out first.
2. Get a secured credit card.
A secured card is like training wheels for a bike. Youâre not meant to use either forever, and a secured card gives you credit practice. You put down a cash deposit, and the deposit amount typically becomes your credit limit.
You are the primary cardholder with a secured credit card, which helps you establish credit better than being an authorized user on someone elseâs account. If you always pay your bills for your secured card, when youâre ready to apply for an unsecured credit card, youâll get your deposit back.
Ask the credit card issuer if they report to the credit bureaus. That is the point, after all, of getting one. Also, plan to keep your secured card for at least six months before you apply for an unsecured card. And keep this tip in mind from accredited financial counselor Roslyn Lash, also known as the OlâSkool Money Mentor: âTo have a better score, do not charge more than 30 percent of the credit limit.â
3. Take out a credit-builder loan.
This is a loan designed specifically to boost your credit history, which is handy for people wondering how to build credit. You take out a loan of, say $1,000, from your financial institution (if it offers this programâyou may need to shop around). Instead of getting the $1,000 right away, the money goes into a savings account for you (one you canât access). You make the payments first, including interest, and then you get the funds.
Think of a credit-builder loan as a forced savings account. Only with a credit-builder loan, you will have established a credit history. Make sure you make your scheduled payments on time. If you skip payments or are late, youâll establish the wrong kind of credit. And negative credit is even harder to fix than no credit.
4. Pay your bills back, and on time.
The most important factor lenders use to determine your creditworthiness is payment history. That is, do you pay your bills, and do you do so on time? âConstantly paying your bills late can ruin your credit, so make it a priority to be on time each month,â says Jamie Wharton with Earnest.com, a low-cost lender.
Wharton suggests setting up auto pay for recurring bills to help ensure you donât miss a payment. âBut just because your bills are on auto-pay doesnât mean your accounts should be on auto-pilot,â she says. âKeep an eye on your bank accounts to make sure you have enough money to avoid costly overdraft fees.â
5. Check your credit report and score.
After all your hard work, youâll want to know if itâs paying off. You do that by getting a copy of your credit report from all three credit bureaus: Experian, Equifax, and TransUnion. Go to AnnualCreditReport.com and request a free copy. (You can get one free copy per year from each bureau.) Read your report to make sure the information is accurate. If not, contact the bureau to correct it.
If your credit report is your school transcript, your credit score is your overall GPA. Most lenders use FICO to find out peopleâs credit scores, which requires at least six months of credit history produce a score. Another credit-reporting system lenders use is VantageScore, which can determine credit history in only one month. Unlike your school GPA though, you can keep working to get your credit score up throughout your entire life. So keep on making good credit moves, and itâll keep on growing.
