How to Create Credit – NerdWallet
Creating credit can be tricky. If you don’t have a credit history, it’s hard to get a loan, a credit card, or even an apartment.
But how are you supposed to show a responsible repayment history if no one will give you credit in the first place?
If your goal is to get a credit card, you can start with a secured credit card or co-signed card, or apply to be a Authorized user on another person’s card.
If you want to create a credit without a credit card, you can try a credit builder loan, secured loan or co-signed loan. There are also ways to use rent, phone, and utility payments to create credit. Some of these means are free, others are chargeable.
Here is an overview of the credit building tools and how to use them to earn a good credit rating.
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Get a secure credit card
If you are building your credit score from scratch, you will probably have to start with a secure credit card. A secure card is backed by a cash deposit you make in advance; the deposit amount is usually the same as your credit limit. The minimum and maximum amount you can deposit varies by card. Many cards require a minimum deposit of $ 200. Some companies like Avant, Deserve, Petal and Jasper now offer alternative credit cards who do not need a security deposit.
You’ll use the card like any other credit card: buy things, make a payment on or before due date, incur interest if you don’t pay your balance in full. You will receive your deposit when you close the account.
Secured credit cards are not meant to be used forever. The purpose of a secured card is to build your credit enough to qualify for an unsecured card – a card with no deposit and better benefits. Choose a secure card with a low annual fee and make sure it communicates payment details to everyone three credit bureaus, Equifax, Experian and TransUnion. Your credit score is established using information gathered from your credit reports; Cards that fall under the three bureaus allow you to create a more complete credit history.
Get a credit builder loan or a secured loan
A credit builder loan is exactly what it sounds like – its sole purpose is to help people build credit.
Typically, the money you borrow is held by the lender in an account and is not returned to you until the loan is repaid. It’s sort of a forced savings program, and your payments are reported to the credit bureaus. These loans are most often offered by credit unions or community banks; companies like Self and Kikoff offer online versions.
Another option: if you have money on deposit at a bank or credit union, ask them for a secured loan for building credit. With these, the guarantee is money in your account or a certificate of deposit. The interest rate is usually a little higher than the interest you earn on the account, but it can be significantly lower than your other options.
It is also possible to get an unsecured loan or credit card using a co-signer. But make sure that you and the co-signer understand that the co-signer is responsible for the full amount owed if you don’t pay. (See “What you need to know about co-signing.”)
A family member or significant other may be willing to add you as a Authorized user on his card. This adds to this map payment history your credit reports, so you will need a primary user who has a long history of on-time payment. Additionally, adding as an authorized user can reduce the time it takes to generate a FICO score.
You don’t have to use – or even own – the credit card at all to qualify as an authorized user.
Ask the primary cardholder whether the card issuer reports authorized user activity to credit bureaus. This activity is usually reported, but you’ll want to make sure – otherwise, your credit building efforts could be in vain.
You must reach an agreement on whether or not to use the card before being added as an authorized user, and be prepared to pay your share if that is the deal you make.
Get credit for the bills you pay
Rent reporting services Like Rental Kharma and LevelCredit, take an invoice you already pay and put it on your credit report, helping to build a positive history of on-time payments. Not all credit scores take these payments into account, but some do, and it may be enough to get a loan or credit card that firmly establishes your credit history for all lenders.
Experian Boost provides a way to have your cell phone and utility bills reflected on your credit report with this credit bureau. Note that the effect is limited only to your credit report with Experian – and any credit scores calculated on it.
Adopt good credit habits
Building a good credit score takes time and a payment history on time.
To have a FICO score, you need at least one account open for six months or more and at least one creditor reporting your activity to the credit bureaus in the past six months. A VantageScore, from FICO’s biggest competitor, can be generated faster.
Practice these good credit habits to build your score:
try make your payments on time and pay at least the minimum if you can. Paying off credit card or loan payments on time, every time, is the most important thing you can do to help build your score. If you are able to pay more than the minimum this is also useful for your score.
If you use credit cards, keep your use of credit low – usage is the percentage of your credit limit that you are using. We recommend that you keep your credit usage below 30% on all cards when possible. The lower your usage, the better your score.
Avoid request multiple credit accounts close together; credit applications may cause your score to drop slightly, temporarily. Multiple applications can cause significant damage. NerdWallet recommends spacing applications about six months apart if you can. Multiple applications for auto loans or mortgages within a short period of time are considered differently.
Keep credit card accounts open. Unless you have a compelling reason to close an account, like high annual fees or poor customer service, consider keeping it open. You can also consider downgrading it or transferring your credit limit to another card. Closing an account can affect the use of your credit and reduce the average age of your account.
Check your credit scores and reports
A credit report is a record of how you’ve used credit in the past. Your credit scores predict how you will handle credit in the future, using information from your credit reports. You’ll want to monitor both to watch for errors and to see your credit building efforts pay off.
See how your score can change
Use the NerdWallet simulator to find out how money movements could affect your credit. Also get a free score.
Several credit card issuers print FICO scores on monthly customer statements and also allow online access. Some card issuers offer free scores to anyone, cardholder or not.
Register to get your free credit score and report by NerdWallet. The information is updated weekly and the factors affecting your score are broken down to make them easier to understand.