What's the Best Way to Build Strong Credit?
Why should you care about credit?
In a nutshell, having strong credit can make it easier to get a car loan, an apartment, a mortgage, and even some jobs. Perhaps most important, it can help you qualify for lower interest rates on your home mortgage, car loans and car insurance premiums — which could save you tens or even hundreds of thousands of dollars over the course of your life.
The next question is how do you build a good credit score?
The answer to that one is a little more complicated: Establishing credit isn't always a straightforward process. Whether you're a young adult, a newcomer to the US, finding financial independence post-divorce or a parent who wants to help your kids, here are some helpful ways to establish and build credit.
Open a bank account
If you haven't already done so, consider opening a checking and savings account at a bank. Although checking and savings accounts don't factor into your credit score, lenders can review them to see how fiscally responsible you are. More important, they're the basic building blocks of your financial framework, enabling you to do everything from depositing your paycheck to easily paying your bills.
Paying your utility bills and rent on time can also show potential lenders that you're responsible. Of course, this only applies if the utilities are in your name and your landlord reports your rent payment history to any of the three major credit reporting agencies.
Apply for a credit card
Used wisely, credit cards can speed up the process of building your credit. If you don't have enough credit history to get a regular (unsecured) credit card, consider a secured credit card, which is tied to your bank account. After you make an initial cash deposit — which serves as your credit limit — you can charge your card up to the amount of your deposit. Be sure to read the fine print: "Not all secured cards are created equally, so ask about fees and how the card activity gets reported before opening one up at a local bank," says financial expert Farnoosh Torabi.
Since credit card companies report activity to credit reporting agencies, healthy activity can be a huge help when it comes to building your credit. Student credit cards and store-specific credit cards can also help you build credit and may be easier to get than regular cards.
Pay in full, and on time
Credit card accounts weigh more heavily on your credit score than loans, but what matters more than your mix of credit cards and loans is that you manage all of your debts responsibly. According to Torabi, establishing a credit score and credit history requires that you have an account open for at least six months, so be patient and diligent about practicing healthy credit habits as early as possible.
If you're a parent, Torabi says it's never too early to start modeling positive credit behavior for your children — and having conversations about personal finances and credit. By making your teenager an authorized user on your credit card account, you can help them establish their own positive credit history. Just keep in mind that you must consistently pay your credit card bill in full and on time, or you'll harm your child's credit report, as well as your own.
Another option is to co-sign a credit card with your under-21-year-old child. “However, it's important to know that if your child doesn't pay his or her bills on time, you're held liable for the amount owed," Torabi cautions.
