Do you have a credit history? If not, then you may find that it’s difficult to qualify for a car loan, get approved for a credit card, or rent an apartment.
Why it is Important to Build a Credit History
The idea behind having a credit history is that it demonstrates how reliable you are at paying bills. However, if you’ve never had a credit card or a loan, then many banks and lending companies may be reluctant to take a chance on you.
Fortunately, it’s relatively easy to begin establishing a credit history for yourself, and it makes sense to approach it with your financial goals in mind.
For example, if you want to obtain a credit card, then you may want to ask a friend or family member to make you an authorized user on their card. You also might obtain a secured credit card or a credit card that requires a co-signer.
How to Use a Secured Credit Card?
With a secured credit card, you make a cash deposit upfront. The amount of the deposit is typically equal to the credit limit on your card. Most banks that offer secured cards require a minimum deposit, such as $200, and the limit usually is fairly small.
The card looks and operates like a regular credit card. You use it to make purchases, and then you pay the purchases off. If you don’t pay off the balance in full each month, interest accrues.
Secured credit cards are not a permanent solution. The only reason to use them is to start establishing a credit history. If you use your secured card wisely, you’ll eventually qualify for a regular credit card that may have a lower interest rate and more attractive terms. At this time, you can close the secured credit card and have the cash deposit returned to you.
Also check out How you can build a credit history.
Want to Build Credit History with Loans Instead?
What if you want to get a loan instead? Some banks offer programs called credit-builder loans. In this program, you “borrow” money from a lender, but the money is kept in an account and not released to you until you have repaid the loan in full. Think of it as sort of a forced savings plan.
You make timely payments, the lender reports your payments to the credit bureaus and, at the end, you get your money back.
Getting Help with Credit History from Family or Other People
Another method for establishing a credit history through a loan is to have someone co-sign with you. Ideally, your co-signer is someone who already has good credit. This individual, who is most frequently a close family member, will be on the hook for the loan if you fail to pay it back. Consequently, it’s critical that you proceed with caution. You definitely don’t want to start a big family fight over an unpaid loan balance. In fact, many people manage to maintain their motivation to repay the loan with the thought that they don’t want the co-signer to have to be responsible for it.
How will you build your credit history? Chances are good that you’ll do it through a combination of credit cards and loans. Just be aware that establishing credit history requires time. Accordingly, it’s not necessarily the best idea to get a tiny loan and pay it back all at once. The better approach is to make timely payments on loans while using credit cards each month to charge a small amount and then pay it off.