Your credit score determines a range of things for you: whether or not you are eligible for a loan, how trustworthy you are with money, and a host of other monetary things. If you have never taken out any type of credit, and have no score to speak of, it can be difficult to get where you want to go financially. If you’re new to credit, and at the point where you want to start establishing a solid credit history, there are two main ways that you can begin to establish credit: opening a credit card or taking out a small loan.
Opening a Credit Card
This is one of the more direct ways to establish credit of your own, and it comes with endless possibilities for you to improve and extend your credit once it is established. While you may feel a bit daunted by opening your own credit card, there are ways that you can open a card without immediately entering into an open-ended loan all by yourself. This is perfect for the person that has no established credit, and relatively little financial experience, compared to the rest of the population.
One of the easiest ways that you can do this as a first time card opener is to take out a secured credit card. The way this type of credit cards works is by opening your account with an initial deposit, and that deposit acts as your credit card limit. That way, you are covered for whatever you spend on the card, and there is minimal risk of the credit card company losing any money, unless you go over your limit.
The benefits of this type of credit card include the fact that this security deposit is completely refundable, and that there is a very, very low chance that any financial institution will not approve you for this credit card. All the while they report your good financial habits to the three major credit bureaus.
Another way that you can establish credit via opening a credit card is to have someone cosign for your credit card, and at this point, that will probably be a parent. A cosigner for a credit card is someone who picks up the debt whenever you fall behind on payment. This reduces the risk of having a complete financial loss for the credit card company, and allows you to have your own credit card, but not have to worry about falling into credit card debt and having to get out yourself.
This also means that you need to trust your cosigner with your finances, and be comfortable admitting that you are in a rough financial situation and need their help paying off your credit card debt, so choose your cosigner wisely. Be careful when choosing a credit card company if you decide that you want a cosigner for your first credit card, because some credit card companies require a minimum credit score or a minimum income, so keep that in mind as you do your research.
Similar to a cosigner, you can also have an authorized user for your first credit card. This method of opening and holding a credit card is one of the more confusing, but here is a quick breakdown.
As you can see, taking out a credit card can be a great option for jumpstarting your credit rating, but you should absolutely avoid signing up for the first credit card you see. APRs, any rewards offered, and any recurring fees are all factors that you need to analyze to make sure your credit card will help you, rather than constrain you. You also have to be careful that you use your credit card wisely. If you don’t, you’ll still build a credit history, but it will be a bad one.
Take Out a Small Loan
If you already have a credit card established, or even if you don’t, a second way to build up credit is to take out a small loan. This helps if you have a credit card because when you have multiple types of trade lines that you are managing well, it proves to the three major credit bureaus that you are capable of handling multiple trade lines and making sure that you remain in good standing with all of your creditors at all times.
If you do not have a credit card, never fear, because there is a special type of loan called a credit builder loan that is perfect for establishing credit. Specialized lenders give people with little to no credit history, but a reliable source of income, the opportunity to pay off one of their very first loans.
When choosing one of these loans, be sure to choose a payment plan that works for your income level because the most important rule of any loan, credit card, or other trade line is to make sure that you pay off your debts in full at the end of every billing cycle. This proves that you know what to look for, and what to do for a loan or any other trade line, and that you know how to successfully manage debt.
In doing so, you also eliminate excess principal that would accumulate more interest for the next billing cycle, thus reducing your overall payment and making it easier to pay off during the next billing cycle. No matter who you are, it is always nice to save some money.
Establishing your own line of credit, and working your way to a solid FICO score, is truly as easy as following one or both of the courses of action listed above. It is not difficult or even impossible; rather it requires only reliable income and the discipline to pay off all of your debts in full at the end of each billing cycle. With both of these tools in hand, you have the opportunity to work your way towards a solid financial foundation upon which you can build the bridge to a bright, stable financial future.