Are you stepping into the ‘Big world of Credit’? As a credit newbie, you must have various queries and concerns hovering in your mind. Most milestones in life, like buying an apartment, purchasing a car, etc., need a line of credit. Most credit cards need a credit history. You may find it difficult to get loan approval if you do not have a credit score or credit history. Also, you will have to pay higher interest rates even if you qualify for the loan.
But don’t worry! The good news is that there are many simple ways to build your credit. If you are looking forward to gaining some significant credit knowledge and aim to build credit and get started, here is the guide.
6 Steps to Credit Building
If you have no credit history and want to start credit building, then follow the steps below:
1. Apply for a Secured Credit card.
Applying for a secured card is one of the best ways for beginners to build credit from scratch. Unlike a standard credit card, a secured one needs a security deposit or collateral. The defaulters on this card do not get their deposit back.
Use your credit card for daily purchases like groceries, toiletries, utility payments, etc. This card works like a regular card. Ensure to make timely payments every month to build a positive credit history. Also, you must evaluate your financial habits before getting the card. You should use the card responsibly to avoid exceeding your budget and becoming debt-ridden. Keep in mind that this card is more of a credit building tool. So, use the card judiciously.
2. Become an Authorized User
Another credit tip for you is to become an authorized user of someone else’s card. If you don’t want to apply for a credit card in your name, ask a friend or family with a positive credit history to make you the authorized user of the card. It will be a good starter for you as you will learn how to use the credit card, make purchases like your own, and track the payment activity in the credit report. However, please remember that if the primary cardholder has issues in loan repayment and chooses not to pay, it will directly impact your credit, too!
3. Get a Credit-Builder Loan
Those who do not have a credit history use credit-builder loans to build up their scores. This is a loan that does not need approval based on credit. If you can afford monthly payments, the credit-builder loan is the best for you. Unlike traditional loans, in this type of loan, you pay the loan to build credit. You are not eligible to receive the loan’s proceeds until the loan is fully paid. Your loan amount will be held in a bank account. You need to make fixed monthly payments, and when the loan term is over, you get the total amount and the interest you paid.
4. Student Loan
Though this is not taken to build credit, even the student loan builds the credit. The credit bureaus check whether the student borrower is paying the installment loan timely or not. If they find you a responsible user, they update the same in your credit history.
5. Pay Utility Bills Timely
You also get good credit for paying monthly utility bills on time. Whether it is a cell phone or a streaming service, pay bills on time. Doing so will boost your credit score. According to the credit bureau Experian, you only need to connect the bank account and select and verify the payment.
6. Keep Credit Utilization Low
You must know that credit utilization rate is the second-most important determinant in calculating your credit score. It is recommended that you should not use your card utilization fully. Keep it less than 30% to get good credit. When you begin using your first credit card, start developing the habit of maintaining the credit utilization low. This is a healthy financial practice that establishes you as a non-risky borrower. So, lower your spending or use multiple credit cards to increase your total credit limit. This will lower your credit card utilization considerably.
7. Monitoring Credit Report
Regular credit monitoring is important to unravel potential errors and discrepancies in the credit report. Any error or anomaly can impact your financial journey. Keep reviewing your credit report and keep looking for inaccuracies that have been impacting your credit score. If you find a mistake or a wrong entry, write to the credit bureau and dispute the errors. You might have to submit relevant documents for the dispute process. The credit bureau will check the report, validate the documents, correct the error, and update your credit report.
Wrapping up
Building credit from scratch can be tricky! However, once done, it opens the door for various financial opportunities. Follow the practical and informative steps mentioned above to build credit easily. Gain more insights on credit improvement measures like timely payments, low credit utilization, diverse credit accounts, regular credit monitoring, etc. As you advance, explore unsecured card options and make a solid credit portfolio.
FAQs
1. What is a credit score?
Ans. A credit score is a three-digit number that represents your creditworthiness. Lenders and employers use CIBIL scores to assess your loan repayment capabilities.
2. How long does it take to build credit?
Ans. It may take two to six months to get your first credit bureau score. Rebuilding a poor credit score takes a much longer time.
3. I have no credit. How should I build credit?
Ans. If you are a beginner who wants to build credit from scratch, enhance credit knowledge, get a secured credit card or a credit builder loan, become an authorized user on someone else’s account, keep credit utilization low, etc.
4. What is the eligibility to get a credit score?
Ans. The people who want to open a credit card account must be at least 18 years old. Minors can still build credit by becoming authorized users on someone else’s credit card.
5. What will be my initial credit score?
Ans. Your initial credit score will be 300. Based on your credit health and loans, this score will move up.
6. How long does it take to have an excellent category credit score of 800?Ans. It may take a few years and an impressive credit history with no default to achieve an 800 credit score.