The Blueprint for Building Credit: A Beginner's Handbook
May 31, 2023
4 min read
Building credit from scratch can feel like climbing a mountain without a map. The lack of credit history can hold you back from getting the things you need, such as a car, a home, or even a job.
The Blueprint for Building Credit: A Beginner's Handbook
The good news is that building credit is a journey anyone can take with the right tools and mindset. Starting with a secured credit card, becoming an authorized user, paying your bills on time, keeping your credit utilization low, and monitoring your credit can help establish a positive credit history.
Strategies for Building Credit From Scratch
Secured Credit Cards
Secured credit cards are designed for individuals with no credit history or poor credit scores. They work by requiring a cash deposit as collateral. This deposit is typically equal to the credit limit of the card.
The deposit serves as a guarantee to the lender that the cardholder will repay the credit card debt. If the cardholder fails to make payments, the warranty is used to cover the debt. Using a secured credit card responsibly can help build a credit history and increase credit scores.
When choosing a secured credit card, it's essential to consider the fees, interest rates, and credit reporting policies. Look for cards with no annual fees and low-interest rates. Also, ensure the lender reports to all three major credit bureaus to reflect your credit history accurately.
Credit Builder Loans
Credit builder loans are another option for building credit from scratch. These loans help establish a credit history by repaying small loans. The borrower pays back the loan in installments, and each payment is reported to the credit bureaus. Once the loan is paid off, the borrower has established a credit history.
The benefits of credit builder loans are that they are typically easy to obtain, and the interest rates are often lower than credit cards. However, the drawback is that the lender may charge fees, and the borrower must have a bank account.
Authorized User on a Credit Card
Another way to build credit is to become an authorized user on someone else's credit card. As an authorized user, you are not responsible for making payments on the card. However, your credit report will reflect the cardholder's payment history and credit utilization. This can help establish a credit history and improve your credit score.
The potential risks of being an authorized user are that the cardholder's negative credit behavior can also impact your credit score. Therefore, it's essential to ensure the cardholder has good credit habits before becoming an authorized user.
Additionally, the authorized user should monitor their credit report to ensure that the cardholder's behavior is not negatively impacting their credit score.
Managing Your First Credit Card
Choosing the Right Card for Your Needs
Choosing the right credit card is crucial for effectively managing your first credit card:
Consider the card's purpose, such as whether you want to build credit or earn rewards.
Look at the fees, interest rates, and credit limits.
Research the rewards program and determine whether it fits your spending habits. For example, a card with travel rewards might be a good fit if you travel frequently.
Check for any additional benefits like purchase protection or extended warranty.
Picking the right card for your needs can help you avoid debt and build a strong credit score.
Understanding Fees and Interest Rates
Understanding the fees and interest rates associated with your credit card is essential. Credit cards charge annual, late, and balance transfer fees. In addition, interest rates can vary from card to card, and some offer introductory rates that expire after a set period.
Understand how interest accrues and how much it can cost you if you carry a balance. Then, use a credit card interest calculator to determine how much interest you'll pay over time. Knowing these fees and rates can help you avoid unnecessary charges and manage your card more effectively.
Building a Positive Payment History
Building a positive payment history is key to managing your credit card. Pay your bill on time monthly, ideally in full, to avoid late fees and interest charges. Set up automatic payments or calendar reminders to help you stay on top of expenses. Keep your credit utilization low, which is how much you use compared to your credit limit.
A low credit utilization rate shows lenders that you're responsible with credit. A positive payment history can help you qualify for future loans and credit cards with better terms and rates.
Avoiding Common Credit Card Pitfalls
Common credit card pitfalls are overspending, carrying a balance, or only making minimum payments. Avoid these by creating a budget and tracking your spending. Pay off your balance in full each month to avoid interest charges. If you can't pay in full, pay as much as possible to reduce interest charges.
Avoid taking out cash advances with high fees and interest rates. Lastly, be cautious about simultaneously applying for multiple credit cards, which can lower your credit score. Avoiding these pitfalls can help you responsibly manage your first credit card and build a strong credit history.
