5 min read
Supercharge your credit score with these simple steps
Building a credit history and improving your credit score is a classic chicken-and-egg conundrum. How do you build a history of making payments on time if lenders won’t give you credit? Hard as it may be, building a strong credit score is a fundamental pillar of adulting. Be it owning your own bungalow with white picket fences or a new Tesla Cybertruck, your credit score determines how easily you can purchase assets. And hence, it’s important that we understand the levers that can improve your credit score fast.
A good place to start building credit is with a secured credit card. This type of credit card is backed by a cash deposit, which is usually the credit limit on the card, and is one way to build credit so that you can qualify for an unsecured credit card later on.
You can use a secured credit card the same way you’d use any other card. But, if you buy something and don’t pay the balance in full by the due date, you will incur interest charges, so it’s important to have sufficient income to make your payments. You’ll also want to verify that the card you choose has a low annual fee and reports to all three credit bureaus so you actually build credit while using it.
Opening a checking account won’t build credit, as any transactions aren’t reported to the credit bureaus. But, opening a checking account and maintaining a balance with no overdrafts will help you build a relationship with the bank or credit union where your account exists. That way, when you do need a loan or a bank credit card, the relationship you’ve built will go a long way in getting you qualified.
Just like the name suggests, a credit-builder loan’s sole purpose is to help you build credit. Like a forced savings account, the money you deposit in your account is held there until you repay your loan, and your payments are reported to the credit bureaus. This type of loan is most often offered by community banks, credit unions, and a few online lenders.
Loan amounts typically range from $500 to $1,500 and interest rates vary. But there are fees for opening the account, for processing payments, and administration fees that can add to the total cost of the loan. To build good credit, you’ll need to make your payments on time and pay the balance in full by the due date.
Much like a credit-builder loan, a secured loan requires collateral, like the money you have in a bank account, a money market account, certificate of deposit (CD), or another asset like your car. Interest rates tend to be a bit higher, but a secured loan doesn’t require a minimum credit score, so it’s a good choice to build credit if you have none. Loan amounts vary but can be as high as $100,000.
Now, we’ve eschewed the irresponsible use of store credit cards before, but cards from stores like Amazon, Target, Best Buy, or Walmart can be a great option for building credit at a low cost. Most retail store cards offer discounts on your first purchase as well as ongoing rewards or cashback offers. Most don’t charge annual fees, but interest rates can be high-up to 27%+. Some store cards require a minimum credit score to apply, but most don’t. However, you will have to show income to prove you can make the payments on your account.
Sometimes a family member will step up and act as your co-signer on a loan or credit card. It can improve your odds of getting a loan and possibly even get you a lower interest rate. However, if you don’t make your payments, your co-signer is on the hook for the full amount. But as long as you pay your bill on time, you’ll be establishing credit. And, when the loan or credit card balance is paid in full, you can re-apply on your own.
Another option is for your family member or significant other to add you as an authorized user on his or her account. Even though payments are added to your credit report, you don’t actually have to use the credit card to cash in on being an authorized user. However, you’ll want to be sure the primary user has a history of making payments on time, or your credit will also suffer.
When considering a borrower’s ability to repay, lenders will almost always consider employment history and salary, as they are looking for stability. On most credit reports, there is a place for employment history. If you’ve been at the same job for years, you are usually seen as a better prospect for credit. On the other hand, if you’ve jumped from one job to the next, you are sometimes viewed as less reliable and a greater risk for making repayments.
If you’re interested in improving your credit score, adding rent payments to your credit report can help. You will have to check with your landlord if they’d offer this facility or alternatively, use services like Rental Kharma and Rock the Score to self report.
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