How to establish a good credit history
Why you need credit
If you don’t have a credit history, nobody knows whether or not you have repaid loans in the past, and lenders tend to be hesitant about lending to new borrowers (or those who have fallen on hard times recently). Good credit can help in several areas.
•Borrowing: The most common use for credit is loan approval. When you apply for a loan, lenders primarily look at your borrowing history and the income available to repay the loan. If you are an experienced borrower with a solid history of paying on time, it’s easier to get approved. Over time, you can get approved for increasingly large loans, including home loans.
Who needs to build credit?
To live in the mainstream modern world, you need credit. Sure, you can live without a credit score, but certain things will be more difficult, and if you change your mind someday, you’ll have to start from the scratch. There’s no need to borrow unwisely or pay more interest than you need to — credit and borrowing are simply tools that you have available to use when appropriate.
How to build credit
To establish a credit history that will be attractive to lenders and others, you would need to borrow money and make all of your payments on time. It is that simple, but it is not necessarily easy. You can certainly see improvements in a short time period, but significant changes take time.
The strategies below would help you get short-term momentum and establish a solid credit history that would serve you for the rest of your life. You don’t have to move through these in order, but the easiest approaches are listed first, especially if you are on your own (without parents or others helping). Depending on your needs and your resources, some of these options might not be a good fit.
•Secured credit cards: A variation on cash-secured loans, a secured credit card also allows you to borrow against money that you have deposited with a lender. The difference is that you would get a plastic payment card that you can use for in-person or online purchases. You can also keep your loan balance at zero (you don’t have to keep a balance on the card), which helps to minimise interest costs. Note that a secured credit card is not the same thing as a prepaid debit card.
•Help from a cosigner: A cosigner is somebody who signs your loan application with you and helps you get it approved. The cosigner should have good credit and enough income to qualify for the loan because they are basically the ones getting approved (although the loan proceeds will go to you). If anybody is willing to do this for you, that loan will help you establish credit as long as you make all of the payments on time.
Cosigning is a huge favour, and it is risky. If you fail to make payments, the cosigner is 100 per cent responsible for repaying the loan, even though you got all of the money.
•Authorised user: If somebody already has a credit account open, they can add you as an authorised user. You would get a card printed in your name, and you would have the ability to use the card for purchases. However, you are not responsible for repaying the loan.
•Retailer programmes: Instead of borrowing directly from banks, you can borrow through retailers, who fund loans using finance companies or banks. You have probably seen offers to buy merchandise on a monthly payment plan or “same as cash,” and those programmes can help you build credit. The same goes for cards issued by stores and gas stations. They may be easier to qualify for than standard credit cards, but you need to make sure that the loan activity will be reported to credit bureau.
Just be sure to pay off your balances quickly. Don’t get caught in the trap of paying minimum payments or you would end up paying more for everything you buy.
•Personal loans: You can also just apply for “signature” or personal loans at your bank. Using an unsecured loan helps you move beyond credit cards and loans from retailers. Instead of paying as you charge, you would make a regular monthly payment (which the credit scoring programmes like to see). With an unsecured loan, you don’t pledge anything as collateral, so the lender takes more risk and charges higher interest rates.
Keys to building credit
•Check your credit: Make sure that your credit reports are free of any errors that will hold down your credit scores. Especially when you have thin credit or you are recovering from a rocky past, errors prevent you from getting the scores you deserve. Fix those errors so that somebody else’s mistakes don’t prevent you from getting the credit you deserve.
•Always pay on time: One of the most important pieces of your credit score is your payment history. If you pay on time, your credit will improve. Late payments on loans will prevent you from making progress, and it is probably better to skip borrowing altogether unless you are confident about making payments.