If you’re new to credit, it’s no doubt that you’re looking for how to build good credit fast so that you can reap its benefits and use it as a wealth-building tool. No matter your age, you’re not too late to build your credit!
I say this in every article I write about credit, but it needs to be emphasized: credit is not for everyone. If you have an uncontrollable spending behavior and find yourself living beyond your means, credit will do nothing more than dig you into a hole. A hole of massive debt.
If you find yourself in a position where you’re spending more than you can afford and have not yet started using credit, don’t start. Instead, get your spending behavior together, start a budget, follow it, save some money, and then consider credit.
But for those of you who aren’t in that position and are eager to start building some credit, let’s begin!
Get a Secured Credit Card
If you’re new to credit, the chances of getting accepted for a credit card or any other loan are quite slim. Especially if you’re doing it alone and don’t have a cosigner.
If you find yourself in this position, then the best tool to start building your credit will be a secured credit card.
What is a secured credit card? It is simply a credit card that requires an initial deposit from the applicant. This deposit is what’s usually used as the credit limit for the card. For example, if you make a security deposit of $500, then $500 is your credit limit.
The deposit is simply required as a form of security for the credit issuer since they have no evidence of how responsible you are with paying back. This deposit serves as a type of collateral in case you default on your credit. But since you’re on this website, you don’t have to worry about that because you will never default on a single payment.
When you apply for a secured credit card, your chances for approval are much higher than if you were to apply for any other card without a credit score or with a low credit score.
When I applied for my first credit card, I started off with Discover It Chrome. It’s a card that I personally love and I still use it a lot!
When I applied, I was easily accepted without any prior credit history and got my deposit returned to me in exactly 8 months. They also provide great cashback benefits by giving 2% cashback on purchases at restaurants and gas stations, and 1% cashback on all other purchases. They will then match your accumulated cash to 100% of what you got in cashback.
From personal experience, I can say that Discover It Chrome was an excellent starter option.
Become an Authorized User
Becoming an authorized user is one of the best things you can do to start building credit. This is a way to piggie-back off someone else’s credit to build your own.
Essentially, when you’re an authorized user, you are able to use someone else’s credit account as if it were your own. Ideally, this should be someone that you trust like a close friend or a relative.
As the authorized user, you are not legally obligated to pay what you use on the account. That responsibility lies solely on the person who listed you as the authorized user. However, the activity on the account is still reported to the credit bureaus as your own activity. Thus, it goes toward your credit score as well as theirs.
But keep in mind that since you’re piggy-backing on someone else’s credit, their activity affects yours, even in the negative cases. This means that if they don’t pay their bills, this negatively affects your credit score as much as theirs.
If you’re still a little lost on how this all works, here’s a brief video overview!
Something to keep in mind however is that after the subprime mortgage crisis of 2007, FICO actually changed the way they weigh the authorized user piggie-backing method to where it’s not as effective anymore.
For example, let’s say that your score shot up significantly from being an authorized user and you go apply for a loan or a credit card. The lender or credit bureau can actually look deeper into your account and see that your higher score is from being an authorized user and thus reject you for some loans.
It’s worth noting that this is not a very common occurrence, but rather a possibility. Nonetheless, it’s worth noting that this deeper analysis and rejection can occur.
Pay on Time. Don’t Carry a Balance
It may seem obvious but the amount of value it has makes it a worthy method to place on this list. I cannot emphasize this enough: paying on time is one of the best things you can do to increase your credit score.
Your payment history accounts for 35% of your entire score. That’s more than any other section of your credit score as you can see from the image below.
In addition, if you aren’t making payments on time, you now owe money. The money you owe accounts for 30% of your score which is the second biggest section of what your credit score entails. In total, this makes up more than half of your credit score.
In other words, if you’re missing payments on your credit cards or other loans, your score is being heavily impacted.
On top of that, the interest accumulating on the money you owe is now compounding and growing as you continue to hold off paying it down. So always make sure to make your payments on time.
To make it easier, something I recommend doing (I also do it myself) is setting up automatic payments every month. This way, you don’t have to think about when your payment is due and you don’t run the risk of accidentally missing a payment.
Also, always pay off your balance in full. Don’t just make the minimum payments. It makes everything easier on you to simply start fresh every single month and not start the month by carrying a balance on your account.
Keep Most of Your Credit Limit Available
Unfortunately, how much we use our credit line heavily impacts our credit score. As soon as you start using it, you are looked at as a borrower. So even if you have a $2,000 credit line, it doesn’t mean go and spend your entire $2,000 credit line month after month.
If you do this, you are seen as a risky borrower. The likelihood that you will be able to pay this back every single month is low.
So, there is a 30% general rule of thumb in terms of credit utilization ratio. What this means is that you should aim to use only a max of 30% of your credit line every month.
You’ve probably heard people say you should aim higher or lower but I like 30% because it’s what I do and it’s worked very well for me. This is the limit I have always stuck to and my score continues to climb.
While building wealth without credit is possible, having it speeds up the process tremendously. It is one of the best wealth-building tools out there.
It’s important that we know how we can take advantage of credit, as well as how we can boost our score to reap its benefits.
But don’t get carried away. You might end up overusing it and spending more than you have. Don’t let this happen.
Remember, with responsible money-management comes responsible credit usage.
If you have any questions, comments, or experiences, please leave them down below! I’m more than happy to hear from each of you!