So, you are interested in building your credit history, but not sure where to start. Here are a few simple ways to begin building your credit. Always make sure that any credit you decide to use fits within your budget, especially if you choose to take out a loan.
1. Start with a Credit Card
The first option to build your credit is to apply for a credit card. There are some things to keep in mind if you choose this route. Credit cards can quickly become dangerous to your financial health if you spend more than you can afford to repay every month and become trapped by the interest rates attached to your card.
To avoid this, limit your credit card spending to purchases you already make. A common strategy is to only use your card to purchase gas and pay the bill in full every month. You already know what your gas spending is like, so this is a simple way to ensure you stay within your budget.
For further protection, choose a card that has a low credit limit. This decreases the amount of financial trouble you could get in by limiting your potential debt. A good goal is to save up the total of your credit limit. This ensures that if you need to make a large purchase on your card, perhaps because you needed a new dishwasher, you will be prepared to pay the balance in full.
My first credit card had a $500 limit and I am so thankful. I was an irresponsible spender in college and wracked my debt up to the limit. I was able to find work and repay it quickly, but having such a small limit saved me from major financial woe.
If this option is appealing to you, the next step is choosing a card. Check with your bank and see if they offer a credit card. Do not take the first card you are offered. Interest rates and cash back benefits vary among different cards and lenders. You can check to see if you qualify for a variety of cards online. NerdWallet has compiled a list of credit cards you can compare to find a good fit, and CreditKarma recommends cards based on your credit report.
2. Pay Your Bills On Time
Credit bureaus track how reliably you pay your bills. This counts for everything from utility and rent bills to your credit accounts. Simply making sure you pay bills in full and on time is an easy way to establish good credit.
3. Consider Multiple Cards
If you are just beginning to use credit, wait to do this until you are familiar with using a credit card, staying within your budget, and paying the bill in full every month. When those criteria are met, adding another card will boost your credit history. Multiple lines of credit provide more information on your credit score that demonstrates your ability to borrow money and pay it back every month.
Depending on what card you already have and where you like to shop, you might consider applying for a store card from your preferred retail store (Victoria’s Secret, JCPenney, Maurices, etc.). Always make sure you have room in your budget before purchasing items from these stores, because their cards do typically have higher interest rates if you ever spend more than you can repay immediately.
4. Apply for a Small Auto Loan
If you need a new car, applying for a small auto loan is a good way to build credit and finance your purchase simultaneously. Like any form of credit, there are some cautions to this method. Most importantly, stay within your budget! In other words, make sure you save for a sizable down payment and do not take out a big loan with large monthly payments. $3,000-$5,000 is a reasonable range for a cheap, but reliable, used car (though this may vary with location).
Taking the time to save up for a down payment gives you the opportunity to shop around. Try looking at Craigslist or another advertising service to find and compare cars in your price range. An Excel spreadsheet is a convenient tool for comparing cost, mileage, age, and condition to find the best purchase.
Meeting with your bank is probably the most important step. Talk to a bank official to determine what you qualify for and ask about loan totals and interest rates. A sizable down payment (ideally half or more of the total cost) reduces the principal, or total amount, of the loan, so you will pay less in interest and be more likely to qualify for the loan.
If this is your first time seeking a loan and you have little-no credit history, the bank may require a cosigner. See if a family member with good credit can help you out. Most car dealerships offer financing, but their loan rates may be higher than those from a bank or credit union.
However you decide to begin building your credit, take time to investigate and consider your options to find the best financial fit for you. Remember to always stay within your budget and pay your bills every month. Then, you can sit back and watch your credit score grow.
Written by Mckenzie Candalot, Staff Writer – Mckenzie Candalot graduated from the College of Idaho with a B.A. in English Literature. She has a passion for written language and helping other women take control of their finances. When not blogging or reading, she enjoys cooking and spending time with loved ones.