6-Step Beginner's Guide to Building Credit
If you have bad credit, important steps such as purchasing a home, using loans to pay for your education and even securing a job can become much more difficult. This is why building solid credit is important. Beginning with your first consumer debt -- often a credit card -- every decision that you make enters your credit history. In order to have a good credit history, you have to use the credit that you have responsibly.
1. Begin Building Credit by Obtaining Credit
Many times, it can be difficult to get your first credit card. Many banks and issuers of credit cards want to look at your existing credit history before they will approve your application. However, there are some steps you can take to open your first credit account. You can:
- Apply for a Secured Credit Card
Secured credit cards such as those offered by the Tier 1 Credit Specialist require you to put down a security deposit to open your account. Your credit limit will be the amount of money that you put on deposit, at least at first. In some cases, your line of credit will be larger than your deposit, but your deposit serves as a sort of collateral. So if you get a secured credit card and put down a deposit of $500, your limit might be $500 or it might be $1000 or more, depending on the issuer. According to Business Insider, this can be a great way to start building credit.
- Apply for a Retail Store Credit Card
Issuers of retail store credit cards generally are more flexible with their credit guidelines. However, take note of the fine print, because the interest rates are often quite high, and the credit limits are quite low. Also, you can only use those cards at specific stores. However, they can be a first step toward credit -- as long as you don't go on a shopping spree that you can't afford to pay back.
- Ask a Friend or Relative to Make You an Authorized User
This means that someone else is adding you to their credit account, and you may get a card in your name from that person. The on-time payments are reported to your credit history. Make sure that the person who is adding you also has solid credit, though, because if they have poor credit, that history will attach to you, as Forbes points out.
- Ask a Friend or Relative to Co-sign for your Loan or Credit Card
If someone that you know has solid credit, that person can apply along with you to help boost your own approval chances. If someone co-signs on a loan or credit card for you, that person shares liability for the account with you. Late payments will impact that person's credit score as well as yours -- so make sure that you can make the payments on time before you ask someone to share their good credit history with you. Once you have some positive credit established, you won't need to have other people apply with you to get approval.