Building credit is a necessary and challenging part of becoming an adult in the US, and throughout the developed world. We’ve talked before here at Wealthtender about how you shouldn’t use your credit score as an excuse to take on debt, but you have to build it somehow. Here are a few safe and simple ways to do it.
Use someone else’s credit history
No we’re not talking about fraud, here. If your parents have good credit history and responsible credit card habits, you can sometimes capitalize on that. Ask if they’ll add you as an authorized user on one of their credit cards. Even if you don’t use it regularly, you’ll show up as a joint owner of a credit card that is used responsibly, and always paid on time. This can impact your credit score fairly quickly. As Experian explain in this article:
“You’ll most benefit from joining an account that has been open a long time, has spotless payment history and has a low credit utilization rate, meaning a small percentage of the total available credit is being used.”
Not all parents will be happy with this arrangement, so you may have to persuade them. If they’re kind enough to oblige, draw up some ground rules. Agree on how and when you’re allowed to use the card, and then make sure you don’t abuse their trust. The aim here is to help you build your credit score. Not cause tension within the family because you didn’t agree in advance how the whole arrangement was going to work.
Get a credit builder card
Some people think credit cards are the root of all evil. I believe that owning one, and using it responsibly, is part of becoming a fully functioning adult. There are a few reasons why owning a credit card can be a good thing, but it does require discipline and good decision making. A low-limit credit card, also sometimes known as a “credit builder” card, won’t let you to take on thousands of dollars of debt. It will set your credit limit low, sometimes as low as a few hundred dollars, and not allow you to charge more than that.
Once you have your low-limit card, simply put a few small purchases on it each month and pay them off on the due date. Never charge more than you can afford to pay off (which means you won’t pay interest), and never miss a payment. This is an extremely easy way to build credit, but you must know what you’re doing. See our guide to credit card jargon, so you’re familiar with what the terms on your statement actually mean.
Get extremely organized
Late payments on anything (credit cards, student loans, car repayments, or your cell phone contract) are highly damaging to your credit score. This is frustrating because a lot of late payments are more to do with a lack of organization than a lack of funds. Sometimes you have the money, and still pay late, because life happens, you get distracted, the end of the month sneaks up on you, and you just don’t realize that a payment is due.
Get super organized with all your payments. Set up automatic ones when you can. Keep track of everything, on paper or in an app. Set phone alerts to remind you of payment days. Do whatever you have to in order to make sure payments are never late.
Develop good financial habits
While the above snippets of advice will help you build credit, the best thing to remember is to simply build good financial habits. By learning and implementing basic good financial housekeeping, your credit score will take care of itself. Good financial habits include:
- Living within your means
- Keeping debt to a minimum
- Making a budget and sticking to it
- Avoiding unsecured loans when possible
- Never missing payments
- Generally keep track of what you earn, spend and save
You don’t need a lot of fancy gimmicks to build credit. In fact, there’s a good argument to build it slowly and organically. Many people go into unnecessary debt, thinking that making lots of repayments, to lots of different lenders, will help them to get a higher score quickly. Know what they usually use that improved credit score for? To go into more debt.
That’s all very well, but keeping debt to a minimum is the foundation of building wealth. Low levels of debt allow you to put money away for your future, have flexibility in your life, build up your net worth, and retire early, if that’s a goal of yours. Of course, it’s important to not do things that damage your credit score. But there really isn’t a huge long term advantage to trying to game the system and build a credit history in record time, either.
Looking for additional tips to improve your credit rating? Check out this comprehensive guide to learn more.