The importance of building good credit history cannot be over-emphasized but it will take conscious efforts on your part to make it happen. Before you can even think of having good credit, you need to have an established credit history in the first place.
If you are applying for a credit card for the first time, there is likelihood that most of the credit card companies will reject your application. This does not necessarily mean that you are having bad credit. It is because you don’t have any credit history. Credit card companies need your credit history in order to assess your creditworthiness. They want to see how you successfully paid the last credit you got. Some people make a mistake of thinking that their credit is good if they have never obtained any loan or credit before. Ordinarily, this seems to make sense. But when it comes to building credit, that practice will not help you in any way. You need credit history before your creditworthiness can be correctly assessed. But the challenge is, how exactly can you go about building good credit history especially when you don’t have any credit card? Well, you don’t need to worry too much about that as this article will throw some lights on the steps you can take in order to make it happen. One can build good credit following the following steps:
How to build good credit history
Get a secured credit card: If you are applying for a credit card for the first time and you don’t have credit history, you may not be able to get a regular credit card. However, you will be able to apply for secured credit card. What is secured credit card? How is it different from the regular credit card? Secured credit card requires that you make a deposit of certain amount with the card issuer. In most cases, the amount of deposit that you make will be the maximum amount you will be able to charge to the card. For instance, if you deposit $300, the credit limit on the card will be $300. This means that you will not be able to charge more than $300 to the card until you make payment. Kindly note that the initial deposit you make will only serve as collateral. You will not need to spend this amount. Any purchase you make with your secured credit card will be charged against the card and not your deposit. You are expected to pay back your card balance at the end of the month. Peradventure you fail to repay the card balance; the card issuer will deduct the card balance from your initial deposit and then pay you the remaining balance of your deposit. Since your aim of getting the secured credit card is to build good credit history, you are not expected to default in your payment. You should only charge small amount to the card and ensure you pay the complete card balance at the end of the month.
If you want to increase the credit limit on your secured credit card, you will need to make additional deposit. For example, if you want to increase your credit limit from the initial $300 to $500, you will need to make additional $200 deposit. This makes secured credit card to share similarities with debit cards. You need to have money in your account before you can use debit card to make purchase. The main difference between debit cards and secured credit cards is that when you use the latter to make purchase, your transactions are reported to the three credit bureaus. However, even though you deposit as collateral for your secured credit card, you are not spending the money. If you use your secured credit card responsibly, your card issuer can issue you regular credit card after one year. If they are not forthcoming, you can specifically ask for this. If your request is granted, this means that you will no longer need the deposit. The deposit will be refunded to you. Don’t expect to receive any interest on the initial deposit amount. Another thing you may need to know about using secured credit card to build credit history is that, it may require that you pay annual fees that are higher than regular credit cards. On this note, you may need to shop around so that you can compare rates.
Read Also: How to Use a Credit Card Responsibly
Become authorised user of someone’s credit card: This is one way that your parents can help you build good credit history. In order to use this method to build credit history, your name needs to be added as the authorised user of the card. You should ensure that your Social Security Number is attached to the card. That is the only way your credit history can be tracked. It doesn’t matter whether you use the card or not. As long as the original holder of the card uses the card responsibly by paying the card balance at the end of the month, it will help you build your credit history. You should only become an authorised user of the credit card that you trust the owner has good credit history. Also, the person must continue paying his bills on time. Otherwise, this arrangement can work against you.
Get a co-signer: Do you know that you can build your credit history without you having a credit card? You can start building credit history through a co-signed loan. You need good credit history to get a traditional loan. This means that you may find it difficult to find a bank that will lend you money without a good credit history. If you don’t have any credit history, that may not be a barrier for you getting a loan if you have someone who can co-sign the loan with you. If you want to use this option to build your credit history, the criteria is that the co-signer must have good credit history. To find someone who will co-sign a loan for you, you must be someone of unquestionable character. You must be well known to the person. Also, you must prepare to pay back the loan so that you don’t put your co-signer into trouble. If you fail to pay back the loan, your co-signer will be held responsible for the payment of the loan. It can also ding the credit score of the co-signer. This can strain your relationship with the person.
Get a credit builder loan: There are certain loans that are specifically designed for the purpose of building credit history. You can apply for a credit builder loan for just a small amount which you will be paid off over time. When you apply for credit builder loan, the loan may not be released to you but you will have to be paying back the loan every month. You may wonder why you should be paying back the money you didn’t receive. Remember that you didn’t need the money in the first place. The reason why you apply for credit builder loan is essentially to help you build good credit history. Nevertheless, the loan amount will be released to you when you finish with the loan payment. You should only apply for the amount you will be able to pay back conveniently without making default.
Read Also: 3 Ways to Pay Credit Card Balance
Get student loans: Another way you can start building your credit history early enough is by taking student loans. If you apply for government student loans, your credit score is not relevant. Student loans can put you far ahead of your mates in building good credit history. If you have been paying your student loans without default, this can help you get auto loan and car insurance at good rates. In case you find it difficult paying your federal student loans, you can take advantage of the different benefits made available to students. These benefits include student loan deferment, forbearance, forgiveness and income-driven repayment plans. These will help you arrange the repayment of the student loans in such a way that is convenient for you without having to experience default.
Get student credit card: The qualification requirements for student credit cards are quite easier. Although the credit limit seems to be very low, you can take the advantage of its less stringent qualification requirements to get one. You just need to ensure that you charge minimum amount to the card and pay off the balance in full at the end of the month.
Get a Store Gift card: Many stores like issuing gift cards to their customers in order to increase their loyalty and patronage. Store cards can be a good way to build credit but one needs to be careful and ensure that it does not lead to reckless spending. If you are not disciplined, you may end up buying what you don’t actually need.
Timely payment of rent: If your landlord reports your payments, timely payment of your rent may be a cheap way of building your credit history.
Why do you Need Good Credit History
You may not know the importance of building good credit history until you need it. But you don’t need to wait till that time before you start building your credit. In fact, at that time, you may not be able to help the situation as it usually takes time to build good credit. Below are some of the reasons why you need to build good credit history.
Employment: As part of the background checks that some employers carry out on their prospective employees, they do check on the credit status of applicants. Therefore, academic qualifications are no longer sufficient. You may have good qualifications and perform excellently at the interview, if you don’t have good credit history, you may not get the job.
Rent of an apartment: Rent is a vital source of income to some landlords. That is why they will like to check on the credit status of anyone that wants to rent their apartment. This is to ensure that the person is creditworthy and will continue to pay the rent as at when due. People with bad credit history may find it difficult getting an apartment to rent.
Loans: If you need to apply for loans such as auto loan or mortgage, your credit history will play a vital role. It will not only determine whether you will be granted the loan or nor; it will determine the rate of interest you will be asked to pay on the loan or mortgage.
Insurance: The likelihood that you will default in paying your premium may not be the main reason why insurers may be interested in your credit history. If you default in paying your insurance premium, the insurance policy can be cancelled. There will be no insurance coverage without premium. Your credit history can influence the insurance rates you will pay on your auto insurance, homeowner insurance and renters insurance etc. People with good credit history can qualify for low insurance rates. They will also find it easier to shop around and compare quotes so that they can choose the one that favours them most.