How To Build Your Credit Score

Having no credit history can make it difficult to get approved for a car loan or apartment lease. When you’re first starting out, though, you’re not going to have the credit history leasing offices want to see. Trying to remedy the situation is a confusing process as well. 

To build a credit history, you need a credit card or loan. To get approved for a credit card or loan, you need to have a credit history. It can be frustrating to try establishing yourself when you’re a young adult. 

Fortunately, there are ways to build credit, even for people who have never had a credit card or been approved for a loan before.

Find a Co-signer

A lot of the time, adults embarking on their own for the first time will have a parent or financially stable partner co-sign loans for them. If it’s the first time you’ve heard this term, a co-signer is someone who agrees to take responsibility for your loan if you stop paying on it.

If you take this route, it’s important to choose a co-signer that already has an excellent credit history. This way you can still be approved for the lease you’re seeking, and you can build up credit history. 

However, because this person is agreeing to help you, it’s important that you keep paying on your loan. Should you default on your payments, your cosigner’s credit will suffer.

Have a Family Member Add You To Their Account

If you don’t have to apply for a lease but you’d still like to build your credit, ask a family member to add you as an authorized user on their account. Being a fully authorized user of a financially responsible person’s account will help you build credit. Be sure that your authorization is tied to your social security number. This way, you can ensure that your smart spending will build your credit.

Part of what makes this option ideal is the fact that you don’t have to make any purchases. As long as the owner of the account pays their bills, you will build credit.

Apply for a Beginner’s Credit Card

Many credit card companies offer cards designed to help consumers build their credit. They’re ideal for people who are starting out because they have low credit limits, higher interest rates, and an annual fee. Because of these features, new credit card users are more likely to spend responsibly.

For full-time college students, a student credit card may be a benefit. On top of being designed for credit beginners, these cards upgrade to a ‘regular’ credit card after the student graduates. Like standard beginner cards, the interest rates are high and limits are low, but they’re a great starting point.

When starting your credit journey, it’s in your best interest not to overwhelm yourself. While having more than one line of credit might build your credit faster, it can hurt your progress without any challenge. Hard credit inquiries tend to drop your score at first, and it takes time to build the score back up. Additionally, falling behind on one card payment isn’t as bad as falling behind on two.

Look Into Credit-Building Loans

Small personal loans will also help a new consumer improve their credit score. The interest for these loans can be somewhat high, while the limits are relatively low. However, if you take out a personal loan and pay it back on time, your credit score will increase. 

There is a variety of lenders that specialize in credit-building loans, so it’s a good idea to shop around. Some lenders offer loans with fair interest rates and higher limits, while others have lower limits and higher interest. The terms are usually short, so you can pay the loan back in a reasonable span of time.

Special Note on Student Loans

If you’re considering student loans to pay for college, making payments on time will improve your score. However, this process takes a number of years. Additionally, if you fall behind on your student loan payments, you may end up hurting your credit score. 

Student loans often have high interest rates, so it’s not uncommon for borrowers to spend decades paying their loans back. Falling behind or defaulting can be detrimental to credit scores, so it’s crucial to choose student loans carefully.

It’s challenging to build credit when you’re starting out, even though the needs of adulthood don’t slow down as a result. Take some time to look into your credit-building options so that you have a clear understanding of what steps you can take. By building your credit over time, you can take advantage of the benefits sooner rather than later.

If you’re still unsure which credit-building route to take, speak to a professional at your banking institution or talk to a credit counselor.