Growing up is inevitable and with this inevitability comes the responsibility to be an adult. One of the many things that adults have to manage in their lives is their finances. When you look at finances one of the most important things is your credit score and the overall credit report.
What is a Credit Score?
A credit score refers to the creditworthiness of an individual. Banks and other lending institutions use this credit score to gauge the creditworthiness before approving loans and other financial products. Credit scores ad made through the credit reports compiled for each individual by three of the credit reporting bureaus in America, namely
These three credit reporting bureaus record all of the financial transactions made by an individual including the payment of utility bills on time, loans, and their repayment including credit card debt. Every payment made on time before the due date marks a positive impact whereas every payment made after the due time, bankruptcy or delinquency marks a negative impact on the credit report which in turn negatively affects the credit score.
This is why it is absolutely vital to follow good personal financial management skills in order to maintain creditworthiness.
How to start building credit?
Maintaining good credit comes later, first, an individual has to build their credit. As soon as an individual turns 18, they can start the process of building their credit. It is therefore very important to follow good personal financial management right from the beginning so that you build up a strong credit report right from the start.
Let us, therefore, look at some ways to build credit once you turn 18.
Become an Authorized user
The easiest way to start building your credit is to become an authorized user with someone else. Usually, parents, elder siblings, relatives, or guardians can provide this facility to minors who turn 18. All that is required is that an existing card user with a long history of card usage and a strong credit score should include you as an authorized user on their card. You will not get a separate card, you will not even be required to make any transactions. Every transaction that is made by the primary card user will register in both their and your credit report, thereby building up your credit.
Credit Builder Loan
Credit builder loans are specialized loans offered to individuals looking to either build up their credit score from scratch or improve their credit scores. Credit builder loans are not usually offered by big, high street banks. They are offered by small banks and credit unions usually.
A credit builder loan is not like your ordinary loan, which means that the funds of the loan, are not disbursed to the borrower when the loan is approved. Instead, the funds are kept in a separate account and the borrower is required to make regular payments comprising of the principal and interest portions.
Some lenders release the funds in the proportion to the payments made whereas others release all of the funds when the loan has been completely paid off. In this aspect, the credit builder loan acts like a savings scheme and a credit building option. The borrowers get the complete amount for the loan once the loan has been paid off.
While taking out a credit builder loan it is important to make sure that the lender reports to credit bureaus. Otherwise, the whole exercise is going to be futile. It is also very important to make sure that the terms of the loan can be easily followed. Credit builder loans usually start from $300/$600 and go up to $1000/$1200 with term limits of up to 12 months.
If the repayments are made on time, then by the time the credit builder loan is paid off, the credit report of the borrower will show a marked improvement. According to publicly available data, the biggest impact on the credit report is made by making timely payments towards loans and utilities.
Secured Credit Card
Another way to build up credit is to take out a secured credit card. A secured credit card is almost the same as an unsecured credit card except for the fact that it has got collateral or security against the card.
Individuals looking to get a secured credit card can contact their banks. The bank will ask for a security deposit against which the credit card will be issued. It is once again very important to follow the best personal financial management practices and make sure that the card is not used to make purchases that the cardholder cannot afford or pay for in time.
Card usage should ideally be kept at 20-30% of the credit limit. So for instance, if the credit limit on a card is $1000 then the card usage should stay between $200-$300 as credit bureaus consider this a healthy usage.
If the card is used responsibly and all of the payments are made on time then upon the improvement of the credit score, the bank will eventually offer to upgrade the secured credit card to an unsecured credit card.
There are a few other steps to build credit too but the three steps mentioned above are the easiest and most efficient way to build credit once you are 18. The ideal strategy would be to adopt all three of the above-mentioned steps, one by one. Start off by becoming an authorized user to get your credit report going. In the meanwhile get a job and start earning a steady income, once you do so apply for a credit builder loan and then go for a secured credit card. If done properly, these steps should allow you to build a healthy credit score.