Whether you have bad credit or a non-existent credit report, building up your credit is easier than most people believe. The important thing to understand is that your credit score is like your financial reputation. It's how banks, lenders, and leasers know who can be trusted to be responsible with lent money or property. A credit score is also built on how you treat borrowed money and property. You can have a pristine bank account and no credit score. The good news is that there are many ways to responsibly use money and loans to raise your credit score.
1. Responsible Bill Payment
The first step is to be absolutely consistent with your bill payments. Rent, utilities, subscriptions and credit card bills should all be paid on-time. If you have no credit history, your remedial or starter credit score is based on how reliable you have been with non-credit payments. If you have handled your money responsibly with no demerits for late payments, overdrafts, or defaulted accounts then you have a strong starting place. Reliable bill payment can help improve a low credit score as well by building a fault-free foundation.
2. Safe Use of Credit Cards
The next step is to use a credit card like clockwork. A secured credit card or student credit card can come with bumpers like a small credit limit and protection against over-charging. Using your card for weekly groceries is a common and smart approach. Really, all you need is a credit card with no yearly fee and a low-interest rate. Then use your credit card responsibly. Treat the credit card like a debit card; only spend what you can comfortably pay back each month. Pay the card completely and on time. This will build a strong foundation for credit or slowly raise a low credit score with a positive record.
3. Authorized Use on a Family Credit Card
Another good way to raise your credit score is to put your name on a responsible cardholder’s account. Teens, for example, can build an initial credit score by being authorized users on parent credit cards. One spouse might become an authorized user on their partner's card, or close friends might share a card. Each time that card is paid on time, both credit scores are positively influenced. But remember, if you are an authorized user on an irresponsibly paid card, your score will go down.
4. Small Responsible Loans
Credit scores rank how responsibly you handle lent money, so taking out a small loan is a smart tactic if you have the opportunity. A car loan or a small personal loan are the two most common ways to use a loan to raise your credit score. Initially, your score will drop when you initiate the loan. But with each on-time payment and each completed loan repayment, your score will go up because you have responsibly handled money lent to you.
5. Correct Outdated Debts
Finally, don't forget to address debts that may no longer be relevant. Debts (all but student and other government debts) cycle off your credit score after seven years, or they should. If any of the debts on your credit report are over seven years old, there's a good chance they are "zombie debts" being illegally kept active by collections companies. You can take legal steps to have these debts removed from the record, which will improve your credit score by removing the demerits.
Building your credit score is much easier than most people realize. Paying bills on time and using a credit card responsibly are all it takes for most to begin moving your credit in the right direction. Take out and repay small loans for a bigger boost and audit your credit report to remove false negative points. With this approach, you'll soon see your credit score on the rise.