If you’re looking to build your credit for the first or rebuild credit, you may not know where to start. Most people understand the importance of a decent credit rating, but if you ask some adults to explain the best ways to build their credit, you might get a bunch of blank stares.
Credit is your ability to obtain merchandise or goods on borrowed money. However, before a bank or other creditor takes a risk, they assess your credit history to see if you have a good repayment history. Since people with no credit history have a clean slate, many in this predicament assume that they’ll be easily approved. But unknown to some, having no credit can be just as bad as having poor credit.
To build credit or rebuild credit, you have to use credit. Creditors keep a record of your activity, and they report this activity to one of the three credit reporting agencies – Experian, TransUnion and Equifax. However, if you do not have a credit account in your name, there’s nothing to report. Obtaining your first line of credit establishes your credit history. Unfortunately, getting credit with no prior history is challenging, but there are ways to overcome this hurdle.
Getting a credit card is one of the easiest ways to build credit or rebuild credit. Granted, you will not qualify for every type of credit card. However, many creditors have credit cards specifically for people with a low credit score or no credit score. Talk to your bank or credit union and ask about bad credit credit cards. These are unsecured credit cards that feature a low credit limit and a high interest rate. You will not receive the most desirable terms, but these credit cards can get your foot in the door.
Another option is a secured credit card. These credit cards are a top choice for people who need to build credit history or rebuild credit because they don’t typically involve a credit check. Plus, they offer a competitive interest rate. However, secured credit cards do require a minimum security deposit between $250 and $500, plus maintenance fees and an annual fee.
Getting a new credit account starts the process, but if you want to build a good credit history, you need to practice good credit habits. This refers to the way you manage your debt and the timeliness of your payments. To build and keep a good score, always pay your credit cards or loans on time each month. Late payments not only prompt late fees, but if you’re more than 30 days past due, this can trigger negative remarks on your credit report.
Additionally, control your spending and keep a low debt ratio. Ideally, the balance on your credit cards should not exceed 30% of your credit limit. For example, if you’re given a $5,000 credit limit, keep the balance on the credit card under $1,500. Make every effort to pay off balances in full each month to avoid debt.
If you own a company, taking steps to build credit or rebuild credit can help you acquire business credit. Several business owners build business credit to give their company its own financial identity. But when applying for any type of business credit card or business loan, it’s customary for lenders and credit card companies to review the personal credit history of the business owner. From their viewpoint, if a business owner is responsible with his personal credit, he’s likely to act responsibly with business credit. If you want to apply for business credit, first contact the IRS to obtain a tax identification number for your business and register your business with the business credit bureaus.