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Tips for Building Credit
It takes many years of paying your bills on time and in full to build good credit. Bad credit or unwanted credit can hold you back from buying a house, financing your education, and even from securing a job.
When you receive your first credit card, everything that you do from there becomes a part of your credit history. If you want to be approved for big purchases like home loans or vehicle loans, it is imperative to have a good credit history so that you are deemed as a non-risky individual who will pay their loans on time.
The good news with building a good credit score is that you can start today with a few simple and easy steps.
1. Get a secured credit card
A secured credit card is a credit card which needs you to make a security deposit against the credit limit before you are approved. This security deposit is used as collateral for the amount of money you charge to the credit card. It is refunded when you close the account, or it’s upgraded to an unsecured amount, so you don’t lose the money. You will most likely be approved for a secured credit card because the deposit eliminates a bit of the credit risk.
2. Become an authorized user on a credit card
A member of your family or a really good friend is a good choice of person to approach. If you are added as an authorized user to the card, you are allowed to make charges to the card which the primary cardholder is responsible for paying. You don’t even need to use the card to build your credit score because it leaves a trail by creating a credit history for you. Not all issuers report authorized user activity to the credit bureaus, so check with the card issuer before becoming an authorized user.
3. Make payments on time
The ability to make payments on time is one of the biggest factors in your credit score. This builds a good credit score because it tells the lenders that you aren’t a big risk because you pay your bills on time. Failing to make your payments on time results in you having to pay interest, as well as a dip in your credit score which could hurt you in the long run.
4. Opening too many credit cards at the same time is a no no
Opening a lot of credit cards in a short time activates what is known as a hard inquiry which will stay on your credit report for about two years. This has a small negative effect on your credit score. If you set off too many hard inquiries, lenders will start to think that you are either running around for cash or are going to add a lot of debt which is a red flag to them. So, the bottom line is that it’s perfectly fine to apply for new credit, just don’t do it all at once.
5. A credit builder loan is a great idea to build a credit score
A credit builder loan is different from a regular loan. How it works is that you make monthly payments into a savings account for a specified period of time. This is reported by the credit union to the credit bureaus which builds your credit score over time. When your loan term has ended, you receive access to all of the money in the savings account. This tells the credit bureaus that you aren’t a risk because you are used to paying your bills on time.
The bottom line is that the bureaus assess you for how much of a risk you are and treat you accordingly. Paying your bills on time means that you are very likely to be approved for bigger loans which could mean the difference between getting that nice retirement house in 10 years or 25 years.
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