How to Build Credit: Complete Guide

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Back in the days of the baby boomers, if someone were to whisper the word “credit” when talking about their finances, you would assume they are talking about their mortgage payments. Today, consumer credit is available in a variety of financial instruments designed to help you leverage your income.

In 1966, Barclaycard was the first financial institution to launch a credit card facility targeting consumers. Up to this point, the best boomers could hope for was a personal loan when trying to secure additional capital.

During the first few decades of its existence, credit cards were a vehicle for use in financial emergencies only. However, over the last two decades, loose monetary policy saw interest rates plummet, affording anyone with a social security number the chance to apply for a credit card.

Times have changed since the Great Financial Crisis of 2008, and credit card companies are now more cautious about issuing cards. However, this doesn’t stop Americans from owning a combined total of $834-billion in outstanding credit card purchases in Q1 2019.

Why is Credit So Important?

We live in an era of monetary policy controlled by central banking authorities around the world. Since the founding of the Federal Reserve in 1913, the world has gradually transitioned from a sound money economy relying on gold and silver for settlement of debts, to a society that uses debt as its monetary model.

One thing is for sure, without the great credit cycle of the last 30-years, the world would be a very different place. Credit allows governments to borrow to fund their budgets, and it will enable consumers to purchase high-ticket items using installments.

Credit is the vehicle responsible for the growth in technology, agriculture, and every sector of human ingenuity. Without credit, we may never have gone to the moon, and without credit, you would not be able to buy a home.

How to Establish Good Credit

If you’re starting your career and want to take a loan for a car to get to work, you may be surprised to find that very few car dealers want to do business with you, unless you take a briefcase of cash to the lot.

When you graduate school, you start with a credit score of zero, and lenders refuse to make loans to anyone with a zero credit score rating. The credit bureau uses FICO scores to determine your level of credit-worthiness. Unfortunately, the only way to get a credit score – is to open a credit facility. As you can see, we are facing a bit of a catch-22 situation.

Lenders want to loan you money, but they want to ensure that you are not a default risk before they hand you the funds. As a result, you need to prove to the financial authorities that you are responsible enough to handle credit. To receive a FICO score, you need at least 6-months of account history with a creditor, and that creditor needs to report your account behavior to a credit bureau.

Fortunately, there are strategies you can use to improve your credit, even if you don’t have any to start. Follow these tips to help you get started building your FICO score.

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Open a Store Clothing Account

Many clothing stores offer in-store credit on your purchases. If you’re a first-time applicant for an account, then the company will most likely limit your account to a few hundred dollars. After showing that you’re capable of managing that level of credit, the company will increase your available credit amount.

Most clothing retailers offering store credit report their account holder activity to the credit bureaus, allowing you to start building your FICO score.

Apply for a Secured Loan or Credit-Builder Loan

Visit your bank and apply for a credit-builder loan. These loans are on offer for first-time lenders, in the hope that the bank will find they have a credit-worthy customer. It’s important to remember that banks want to loan you as much money as possible – but they want to prove that you can pay it back.

With a credit-builder loan, you have the chance to prove your credit-worthiness to the bank, and you will most likely get full access to their range of credit facilities after successfully repaying the credit-builder loan.

Many banks will issue credit-builder loans as a type of forced savings program. They allow you to repay the term of the loan and then release the funds directly to your account after the last payment lands. Using this strategy, the banks take no risk, and you get to prove to the institution that you are credit-worthy. You can find these credit-builder loans on offer at community banks and credit unions, with a few online lenders available as well.

A secured loan is another option for those people with savings. In this case, your savings account acts as collateral for your loan, and if you default on payments, the bank seizes your savings to cover the loss.

Apply for a Secured Credit Card

Using a secured credit card is a great way to get started with building your credit score from the ground up. This facility works in much the same manner as a secured loan.

You need to deposit your credit limit into your credit card facility to activate the account. This security acts as collateral on your spending, and if you defa8ult on payments, then the bank takes the money to pay the card from the secured funds.

Secured credit cards are meant to be a temporary facility. Banks design secured credit card products with the hope of teaching you how to manage a credit card responsibly. The bank will report the activity on your account to all three credit bureaus, TransUnion, Equifax, and Experian.

You use the secured credit card like you would a regular card facility, swiping for your purchases during the month, and then repaying your due amount at month end. Eventually, after proving to the bank that you can handle a credit card, they will offer you an unsecured card with a higher limit.

Have Someone Sign Surety

If your parents are willing to sign surety on a loan or credit card facility for you, then that’s a great way to start building your credit. A surety document ties the person signing the surety to any debts incurred by using the credit facility. Should you default on any payments, the co-signer is liable for the debts.

Banks treat surety accounts like real credit card and loan accounts, and the institution will report all payments to the credit bureaus.

Gain Authorized Use of a Parents Credit Card

If your family members already own credit cards, then you can boost your credit by piggybacking on their credit rating. Ask the family member if the bank can list you as a verified user of the card, with signing power over the account.

This way, you can build your credit without ever using a facility. However, it’s important to note that should your parents or relatives get into financial trouble with their credit facility, and this will affect your credit score as well.

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Receive Credit Points for Your Rent

Some rent-reporting agencies, such as RentTrack and Rental Kharma, take your rent bill and add it to your credit report, allowing you to benefit from building your credit by paying your rent.

Considering that a lease is a binding legal agreement, and at its core, a loan agreement, it’s surprising how not all rental agencies and credit bureaus take rent payments into account for building your credit score.

Check with your rental agency about whom they use in their accounting and reporting to ensure that you get something back out of your lease, other than a place to stay.

The Best Strategy for Building Good Credit

All of these vehicles mentioned above are excellent for helping you start to build your credit score. Choosing the right strategy depends on what goals you have in mind. If you’re looking to build credit to buy a house or a car, it may take some time before you reach the required levels needed to qualify for a loan of that size.

However, if you’re looking to secure a personal loan under $10,000, then 6-months of reporting by a creditor to the bureaus should be enough to get your credit score to a suitable position to qualify for the loan.

Whatever your goals, it’s vital that you build your credit score by implementing good habits into managing your finances. Practice the following strategy to ensure that you raise your credit score as quickly as possible.

Always pay your full outstanding balance on time, every month, preferably a few days before it’s due. Never miss a payment, and try not to pay only the minimum outstanding balance. By clearing your account on time every month, you start a good track record of timeous payments with your credit provider and the bureaus.

Failing to pay your loan or credit card bill on time will result in a reduction of your credit score. If you allow your facility to go into arrears, there’s a good chance that the lender may send debt collectors after you to recover the funds. Failing to repay your debt will result in severe damage to your credit score.

Those individuals that default on their debts, and choose not to pay them back, may run the risk of the creditor filing for a judgment against their name. A default judgment is a serious mark against your name. When a creditor blacklists you, you’ll find it challenging to secure a lease on an apartment, you may have trouble finding insurance, and some employers may refuse to hire you as well.

Only utilize what you need from your credit facility and always leave room for emergency spending. If you have to carry some of your balance over to the following month, make sure it’s no more than 30-percent of the total credit limit.

Avoid opening too many credit facilities all at once, as this could bring your score down. It’s best to add a new facility every six months to allow tour credit time to establish itself before adding a new facility. Every time you open a new credit facility, the vendor will check your credit report. Having too many views on your credit also brings down your credit score as well.

Keep your existing credit facilities open for as long as possible, even if you aren’t using them. Unless the account costs a service fee, it’s better to leave it open than close it down. Make sure you receive an annual credit report from your credit bureau. Your report will give you your credit score and a summary of any outstanding debts.

Check Your Credit Score and Credit Report

Your credit report is an official record of how you managed your credit facilities in the past 6-months to a year. The report also projects your credit behavior into the future, applying a score to your account. You need to pay special attention to both and review your credit report at least once a year.

The credit report is a useful tool to see how your credit-worthiness is coming along, and it also lets you know if anyone is using your personal information for financial fraud. Some hackers and online criminals steal credit card data and personal information from online sources and then sell your details on the dark web.

Scammers then buy this information and use it to make fraudulent purchases on your account. Some scammers may go as far as stealing your identity to allow them access to government social programs or for opening accounts in your name. Reviewing your credit report helps you identify any unusual financial behavior occurring in your name.

If you want to check your credit score, TransUnion offers an annual report for free once a year, and there are hundreds of niche financial sites which let you view your credit score. Some credit card issuers will even print your monthly credit score on your statements.


Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased