As young professionals, many of us run into the problem of having little or no credit. Without a credit history, it is likely you will face many obstacles such as getting a job, an apartment or even a credit card. Don’t worry, you are not alone! Below are some ways to build credit starting from scratch.
First let’s do an overview of what credit really means to us:
What is Credit?
Credit is your reputation as a borrower. It tells others how likely you are to repay your loans. Credit is made up from information about your borrowing history. Most of the information comes from your credit report.
Why is it important?
If you do not have a credit history, lenders are unsure whether or not they should give you money. Without any credit history, they can’t tell if you are a responsible debt-payer or a bad risk. You need to build credit in order to prove you are worthy of paying back what you owe.
Now that you know what credit is and why it is important to you, check out some valuable tips to lead you in the right direction when it comes to building credit from scratch:
1. Get a secured credit card
More often than not, it takes credit to get credit. That’s why a secured credit card is a popular way to get your foot in the door. With a secured card, you’ll place a security deposit with the financial institution and, in turn, get a card with a credit limit that is usually equal to the deposit. Other ways to build credit include getting a retail credit card or student loan.
2. Use it, but don’t abuse it!
It is tempting to splurge when shopping, especially when you have a credit card. The feeling of buying now but paying later can get pretty addicting. Be smart! Only buy what you can afford. Constantly being in debt is hard to get out of and the interest you owe will only hurt you more. To start, you should use your credit card for smaller purchases. Use it constantly to build credit, but only for things you are able to pay off such as gas or groceries.
3. Make payments on time, all the time
This is the number one rule of having a credit card. Never make a late payment! One late payment could prompt a credit card issuer to increase your interest rate to a higher APR. So don’t catch yourself falling behind. Create a schedule for yourself to stay on track with your finances.
Each time you apply for a credit card or loan, your credit score takes a small hit. There is no reason to damage a credit score you’re trying to build up, especially when you have demonstrated that you are unable to handle a single credit card. Instead, use that energy to prove to yourself that you can keep the balance low on one credit card and pay the bill on time every month.
5. Pay your credit card in full every month
Paying off your credit card in full each month is a vital way to increase your credit score. Always pay more than the minimum, if possible, to avoid paying more in monthly charges. When you pay your balance in full every month you won’t be charged any interest since you haven’t let the balance on you card sit and accrue that interest.