How to build credit

In order to pay for big expenses like college, owning a home, buying a car, or starting a business, most people will need to borrow money. A low credit score could mean getting denied or having to pay a lot more for that car loan.

Building good credit is a lot like building or renovating your first home. There’s a lot of information you need but don’t know yet. The key is to gain a thorough understanding of your credit score and how it works. Everyone has different credit starting points; to continue with the analogy, some will find themselves building from scratch while others will be trying to restore a credit score fixer-upper.

Wherever you are in the credit building process, it will take time, patience, and persistence. Let’s get started.

Pulling a copy of your credit report is the perfect place to start your credit-building project. You get to review one free report every 12 months from each of the three major credit bureaus — Experian, Equifax, and Transunion. Some websites offer these services for a fee, but do your best to stick to the free reports.

Each credit agency will have slightly varying reports of your credit history. If you have less than six months of reported credit history, you may not have enough information to generate a report. That’s OK. You’ll get there.

If you do have information on your credit report, go through it and make sure everything is accurate. Identity theft happens. Dispute anything that looks incorrect directly with each bureau. Although your credit report is full of useful information, it won’t give you an actual score. There are a lot of websites and apps that will provide your official credit score for free. Read reviews and make sure the site or app you choose is trustworthy.

Piggybacking is when an extremely trusting person allows you to become an authorized user on their credit card. This means you’ll have access to their credit card to help build your own credit. In most cases, you’ll get your own card with your name on it. If you have little to no credit but someone in your life has a score of 670 or above, this may be a great option for you.

To get the credit-building benefits of piggybacking, first have the primary card holder call the card company to make sure it reports authorized user activity. Piggybacking is a shared responsibility. If the primary owner misses a payment, your credit report will also be negatively impacted. Exercise caution when considering this option.

Pro tip: The best piggybacking sponsors might be your parents or a spouse.

If you’re building or repairing your credit and piggybacking isn’t an option, a secured credit card is another great way to get started. A secured credit card allows you to pay an upfront deposit (about $200 or $300) in exchange for a limited line of credit. The deposit is held as collateral in case you default on your payments.

Make sure the credit company reports your payment history so it will improve your credit rating. Interest rates on secured cards tend to be higher than other cards, so keep the balance low and pay off your entire bill every month to build a strong credit history.

After about 6-12 months of on-time payments, you’ll likely be able to apply for an unsecured card with a lower interest rate, as well as perks like a higher credit limit, cash back, or travel rewards.

Pro tip: Make sure you read the terms and conditions before signing up. For example, some companies require a $300 deposit, but keep half of that as fees ­— leaving you with only $150 to spend!

If your credit rating is lacking a co-signer could help you get a loan, and help build your credit rating. A co-signer will enter into the loan agreement along with you, which makes them equally responsible to pay back the loan. If you fail to make your payments, both of your credit scores will take a negative hit. The co-signer is often a parent or someone you trust, and they’ll need to have good credit to help you get approved.

Alternative data is any payment information that isn’t normally or automatically reported to credit agencies (unless you default). For example, payment of rent, utilities, streaming services and cell phone bills are not monitored by credit agencies.

You might want to ask your prospective lender if they accept alternative data in making their lending decisions. If so, you’ll need to sign up for special services such as rent reporting. There are lots of low cost or free companies that offer this service to applicants with thin or non-existent credit profiles.

Once you have some credit established, your financial well-being depends on maintaining good credit habits.

• Pay your bills on time. All the time. This is especially true on accounts that are reporting to the credit bureaus. Payment history is 35% of your credit score!
• Credit cards have a minimum payment due every month. Do your best to ignore that, and pay the entire balance every month to avoid paying interest. Why give money away? If you find you’re not able to pay the entire balance, you are probably overspending.
• Don’t max out your cards ­— keep your credit utilization low (under 30%). For example, if your card has a $1,000 credit limit, treat it as though it was a $300 limit. Utilization makes up 30% of your score.
• Don’t apply for a bunch of credit accounts at once, especially if you’re getting declined. When lenders check your credit, it creates a “hard inquiry” on your report, which temporarily hurts your score (unless you’re shopping for a mortgage).
• Stay informed. There are trustworthy websites and apps that keep track of your score for free. Again, identity theft happens.

By just taking the time to learn how to build your credit, you’re already off to a great start. You’re either laying a strong foundation or fixing what has been broken or neglected. You should feel good about that! You have some work ahead, but with the right tools and some elbow grease, you can take your credit score straight to the bank.

Building your credit is important to help position you for life’s biggest expenses. To learn more about our credit cards and debt consolation loan options, please call 1-888-333-5145, visit us online, or schedule a Citizens Checkup at your nearest Citizens branch.