How to build your credit score
You already know what a credit score is and how it works (if you haven't, check out THIS article first!), but do you know how you actually begin to develop your credit score? More importantly, do you know how to build a good credit score from the very beginning?
If you've read the article I mentioned earlier, you might have some idea of what a credit score is, why it's important, and what you can do to better your score. That's great, and you should keep those things in mind moving forward. But, it's pretty hard to move forward if you never start.
So, let's get started and look at a few options to begin building your credit. Regardless of whether your score is good, bad or nonexistent, some of these tools might be useful in building up your credit score.
Apply For A Loan
A good number of millennials with a degree will already have student loans. As long as you've been making payments on time, you probably don't need to take out another loan. The same goes for a mortgage, car loan, etc. Carrying these loans might help boost your credit score, because a) you've shown that you're responsible enough to make payments, and b) it could add to the length of your credit history.
However, it's not completely uncommon for younger people to have no major loans in their name. If that's you, I'm sure you're really disappointed you don't have to worry about monthly payments right now...
You sure are missing out.
In reality, while it's good not to be overloaded with debt, it may actually be hurting your credit score if you haven't utilized a loan. Yes, I agree, it does suck knowing that you have a monthly payment. It also sucks that you're paying interest on it. Unfortunately, when it comes to building your credit score, having a loan doesn't suck.
While I'm not advocating for you use a loan to go out and buy something expensive that you don't really need, I would recommend taking a minor loan if your credit history is lacking. In the past, a mortgage officer actually suggested that I take a $500 loan simply to build credit.
You're right, this sounds stupid, but that's how this game works. Talk to a local bank or credit union and request a somewhat small personal loan. DON'T GO SPEND THAT MONEY! You should literally just keep it in a bank account and use it to repay your loan. A $500 personal loan for a year will end up costing you around $15-20 in interest, but it will also boost your credit score which can save you much more than $20 in the long run.
Some financial organizations also offer a credit-builder loan that makes the process even easier. You should ask your local lender if that's an option.
Open A Credit Card
Again, you've probably heard that you should avoid debt and credit cards. Not a bad principle to live by, but avoiding credit cards alone won't help your credit score.
Just like taking a loan, using a credit card will help develop a credit history and will show that you can make payments. In addition, a credit card will also gain (or lose) you some points in your credit utilization. AKA keep your balance low.
A good strategy to use for building your score is to only buy groceries with your credit card. Keep it easy by not using it for anything else. Then, each time you use it, pay off the balance as soon as you can. It should literally take you a minute to do this online.
Don't forget to make payments, though. Skipping out will hurt you twice. Your credit utilization will go up AND your payment history will take a hit. Not smart.
Some people I know are scared to get a credit card because of how much easier shopping becomes. I can definitely understand that fear. However, I know that because you're reading this, you care about your future. Use this to your advantage and develop a strategy to stop you from spending. Maybe you hide your card until it's grocery day. Or, maybe you leave it with your parents. Pick something that works.
This may all sound great, but how do you actually get a credit card? I'm glad you asked!
How To Get a Credit Card
Fortunately (unfortunately?), it's really easy. All you need to do is talk to your local bank or credit union and they can usually hook you up.
One problem, though. I'm sure you've heard the saying, "it takes money to make money." Well, it usually takes credit to get credit. Before you get discouraged, there are a few easy ways to get around this requirement.
The first option is to get a cosigner on a credit card. A cosigner is basically someone who guarantees that if you can't make the payment, they'll make it. Because of this, you probably will want to find a family member, spouse, or close friend who might be willing to cover for you. It's easy, but it also puts someone else at risk.
Option two is more self-reliant, but has more barriers. There is something called a "secured credit card," which is similar to a normal credit card in most ways. The major difference is that you're required to give the bank a pretty big amount of cash when you apply. Basically, if you request a credit card with a $500 limit, you're going to give the bank $500 cash up front. You'll still make payments on your card and build credit as you normally would, but the bank now has your $500 as a way to eliminate their risk.
Nobody wants to take a risk on somebody that they know nothing about, so why would a bank risk money by giving it to someone with no history? The answer is, they wouldn't. A cosigner or secured deposit act as a way to reduce risk for the bank. Either way, both options will work to help you get started in building credit.
Just be responsible, please.
Credit can be a scary thing for a lot of people. Most of us would prefer to not make interest payments or be neck deep in debt. On the flip side, using credit wisely and responsibly can help to make your financial future much more secure.
If you don't have a credit score yet, that's okay. It will probably be more difficult for you to apply for loans in the future, and if you do get approved, you may not have a great rate. But, you're also simplifying your situation by not having any monthly payments. So really, there are a lot of pros and cons to this situation.
In the long run, the benefits of a strong score will outweigh the costs. I'll admit, opening up loans and credit cards can be daunting. While building up your score is important, you also have to recognize that it will add to your list of responsibilities. Missing payments and maxing out credit cards will hurt way more than help.
Don't make these decisions lightly, because you'll have to budget tightly. But not really too tightly. I just like to rhyme.
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