Credit is everything in today’s economy. Consumers invest millions each year in keeping tabs on their credit scores and improving them any way possible. Bad credit can haunt you for years. But possibly even worse than bad credit is having no credit at all.
Everyone has to start somewhere when it comes to building credit. Maybe you’re a college student or young adult just starting to support yourself. Or maybe you’re recovering from bankruptcy or a divorce, and need to rebuild credit now. Build a strong foundation and you’ll be on track to sound financial footing in the years ahead.
Pay Your Bills
The first thing to do is pretty simple: pay your bills. Maybe all you start with is a cell phone bill. Do whatever you need to do to make sure you pay it on time. Set a budget and spending priorities. One missed bill may not seem like a big deal, but the effects can cascade. Late fees and penalties make it hard to catch up. Then, if a company sends your account to collections, things get worse. The failure to pay then winds up on your credit report. And when you’re just starting out, one negative like that carries a lot of weight.
Open a Credit Card
A great way to build credit is to open a credit card and pay it on time, every time. When you start from scratch, you’re likely to get a card with a high interest rate. Don’t fall into a credit trap! Use the card only for things you would buy anyway and already have the money to pay for. Then, pay the balance in full. As you go along, the bank may offer to increase your limit. Take the offer. That will improve your credit-to-debt ratio, a key factor in your credit score.
If you get turned down for credit cards at first, you may be able to get a secured credit card. Talk to your bank. These are lower risk because they’re backed by money in your bank account. Another option is to open a credit card for a specific store. These are easier to get but beware the high interest rates! Use your store cards sparingly.
Ask Your Parents to Make You an Authorized User
Your parents or other family members can add you to a bank account or credit card account. In some cases, they can set limits about how you can use it. But having your name attached to an account in good standing starts to build your credit. Later, they can remove you as you establish more credit on your own.
Ask Your Landlord to Report Your Good Payment Habits
Credit reports and scores don’t automatically include rent or utilities. However, some consumer advocates hope to change that. An option, for now, is to ask your landlord to report your payments to the credit agencies–provided, of course, that you pay on time. If you have to pay rent anyway, you might as well get some added benefit from it, right?
Buy a Car
This could be a good time to buy a car that you finance. Just make sure that any debt you take on fits into your budget.In other words, this probably isn’t the time to buy your dream car. Shop for a monthly payment you can handle. Remember to account for maintenance, repairs, insurance, and parking. Shop around to see what kind of interest rate you can get. If the only rates you’re eligible are sky-high, you might ask someone to co-sign the loan for you. In addition, pony up as big a down payment as you can to keep the overall cost of the loan down.
Slow and steady builds good credit. Stay on top of your budget, take on debt you can manage, and start watching your credit score. In time, you’ll be able to get more credit and better interest rates, working toward your ultimate financial goals.