Lenders, rental offices and insurance companies use your financial track record to judge how likely you are to pay debts and bills — and if you’re a blank slate, you’re generally considered a risk.
Fortunately, there are some simple steps you can take to quickly establish your credit record.
Start with a credit card
One of the quickest ways to develop a positive credit history is with a credit card, which lets you show that you handle small amounts of debt responsibly month after month. Even if you can’t qualify for a card on your own, there are ways to take advantage of this credit-building tool:
- Recruit a co-signer. You might be able to get a card if someone with good credit — such as a parent — is willing to co-sign the application with you. You and your co-signer will be equally responsible for the charges you make, along with any late-payment fees or other penalties if you don’t make payments on time. Also, late or missed payments can damage your credit score and your co-signer’s, too. But every time you make a payment on time, it will shore up your credit history.
- Become an authorized user. Another option is to ask a family member or significant other to add you to their credit account. First, though, make sure their bank reports activity by authorized users to the major credit bureaus — otherwise, this won’t help your credit score. And remember that here, too, your activity with the card can affect someone other than yourself.
Once you have a card, your behavior with it will determine how high, and quickly, your credit score rises. To keep moving in the right direction:
- Make on-time payments. The most common credit-scoring model is the FICO score, and it is based on a combination of factors. The biggest, making up 35% of your score, is your payment history. Pay all of your bills (not just your credit card) on time to keep your score rising.
- Keep balances low. Try not to use your card up to or near your credit limit; it looks bad to creditors if your cards are maxed out. A good rule of thumb is to keep your balances at or below 30% of your total credit limit.
- Don’t over-apply for cards. According to a recent NerdWallet study that included an analysis of millennials’ credit scores, many young adults are applying for the wrong credit cards and getting rejected — and that’s hurting their credit, since excessive inquiries can make someone look like a bad credit risk. Apply only for cards you really want, and space out those applications.
- Check your credit reports. You have the right to get a copy of your credit report from each of the three major reporting agencies — Experian, Equifax and TransUnion — once a year for free. Review yours and report any errors that might hurt your score.
It can be easier to build up good credit if you have a professional helping you. Consider consulting with a financial institution to help figure out the best way to establish credit and make other important financial decisions.
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