Having good credit is an essential factor in being considered eligible for credit cards and loans. However, to build it, you need to have a reliable credit history. That makes it a Catch-22 situation for young adults and others who are starting and want to find the fastest way to build credit.
How do you build credit when you’ve never had a credit card or taken a loan? And how do you convince lenders to give you credit cards or extend loans when you don’t have a credit score?
Fortunately, though, you do have options to get around this conundrum. Moreover, you will even be able to build credit fast. Here is a step-by-step guide to help you:
Apply for a secured credit card
While many lenders will hesitate to give you an unsecured credit card if you don’t have a credit history, they won’t have a problem with offering you a secured credit card. In this type of credit card, you must make an upfront cash deposit that is equal to the credit amount limit. You can then use the card to make your purchases and pay off the balance every month.
The lender will report your payment history to the three credit bureaus—Experian, Equifax, and TransUnion—and it will impact your credit score. By staying below the credit card limit and making regular payments, you can increase your credit score and build good credit. You may even become eligible soon for a regular credit card.
Get a credit builder loan
You can get a credit builder loan from your local bank or credit union. After you apply for the loan and get approved, the financial institution will deposit the loan amount into a savings account for you. However, you can access the funds only after you have repaid the loan in installments over the next one or two years. Keep in mind that the whole point of such a loan is to offer you the fastest way to build credit. The three credit bureaus will make note of your regular loan payments and that will push up your credit score.
Keep your credit balance down
Paying your credit card bills on time is essential. However, instead of making a lump credit card payment once a month, consider making several small payments over the weeks. Pay right after you’ve used the card to make a purchase. These multiple payments will keep your credit utilization rate low, and that will work to your benefit when it comes to improving your credit score.
Ask the card issuer to raise your credit limit
By increasing your credit limit, while your balance remains the same, you can lower your credit utilization rate. Having a low credit utilization rate is crucial for obtaining a high credit score. However, remember to ask your credit card issuer if it will be possible to increase your limit without going through a hard credit inquiry. That might not be in your interest and might even end up lowering your credit score.
Become an authorized user on an existing credit card
The fastest way to build credit is to ask your family or friends to add you as an authorized user on their credit card. You don’t need to use their card, just be on it as an authorized user. Their credit history will then show up on your credit report and will be instrumental in boosting your credit score. Of course, that will only happen if they are fiscally responsible, stay well below their credit limit, and make their credit card payments on time. If they’re not, your credit score will take a nose dive along with theirs. So, only ask people you absolutely can trust.
Pay all your bills on time
While the FICO score doesn’t consider your rent and utility bills, other sources like the FICO Expansion Score and the Payment Reporting Builds Credit (PRBC) company do cover these payments. If you have been timely with paying your bills, it will increase your creditworthiness with lenders. Along with these steps, it will also help to review your credit report annually and make sure that it does not contain any errors that might damage your credit.
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