Chances are that any financial lender who is considering you as a client is going to use your credit history as a means of predicting how reliable you are in paying them back what you owe them. This means that a good credit score is essential in getting approved for buying a car, renting an apartment, taking out a mortgage loan, qualifying for a better insurance rate, and even landing a job at some companies.
Having a lack of credit or a low credit score can bar you from some of these things altogether or, at the very least, saddle you with less-than-ideal conditions within your contract. Building a positive credit score takes time and diligence, but it doesn’t require financial wizardry to accomplish. In this article, we will touch on how credit history is built and will then give you a handful of ways in which you can add credit to your credit report.
Adding Credit to Your Credit Report: How it All Works
Every month, on average, any creditors and lenders that you have accounts with send account updates to the three major credit bureaus – Equifax, Experian, and TransUnion. They may report your history to one, two, or all three of these bureaus. Typically, these bureaus do not share information with one another, so it is possible that some of your accounts only show up on one credit report. Creditors and lenders send these bureaus information about your current balance, payment history, and other details about the accounts you hold with them. This information is then processed into your credit report and an algorithm is used to generate a credit score any time that you or a business requests it.
If you have been making your payments on time and have been keeping up with your credit card balances, then your credit score will be higher. This is what potential lenders and creditors want to see when they consider doing business with you. It illustrates that you have healthy financial habits and will be more likely to repay them.
Even when you have made big changes to your financial habits, the changes aren’t reflected in your credit report overnight or even in a few weeks. Establishing a pattern of healthy behavior takes time. The best way to help yourself is one responsible choice at a time, knowing that each decision brings you one step closer to securing your financial future.
Now let’s get into some of the ways that you can make those responsible choices.
Oh, but first: if you don’t even have an idea of what your credit is, a great place to start is by learning your credit score. Don’t be afraid, in this case knowledge is power. Click here to get started with your ideal credit check.
Get a Secured Credit Card
Poor credit, or a lack of credit history, can prove difficult when trying to apply for a traditional credit card. Many companies, however, offer a different type of credit card option in a secured line of credit. When you are approved for a secured credit card, you deposit the cash you would borrow against upfront. This amount establishes your credit limit and you charge purchases to it the same way you would with a traditional card. You make payments on the balance and incur interest if that balance isn’t paid in full. The minimum and maximum amounts required for the initial deposit vary from card to card, but once the account is closed, that initial deposit is repaid to you.
Secured cards are an excellent way to build your credit to a high enough score that you can then apply for a traditional credit card. When you are applying for your secured card, double-check that it reports your payments to the three major credit bureaus.
Check Your Existing Bills
Many people are unaware that not all of their bills are regularly reported to the credit bureaus. Cell phones, cable or streaming services, auto insurance, utilities, and sometimes even rent payments are all things that often go unreported when they are being paid on time. If you default on these bills, however, usually by becoming several months behind, your account could be sent to a collection agency. If that happens, it will then be added to your credit report, which will damage your credit score in a big way.
If you are making timely payments, however, you can have some of these bills added to your credit reports to help build your credit score. While you cannot add things to your credit report directly, there are services that can do so for you. You should consider if the cost of hiring such a service is worth the positive impact it may have on your credit. Not all of the bureaus will consider these bills, so you need to check the details of the specific service you are looking into hiring.
Become an Authorized User
You can check with family members, friends, or your significant other in order to become an authorized user on their credit card. If they are willing to do so, this would add that card’s payment history to your credit report and also allows you to make purchases against that line of credit. The primary account holder is responsible for paying down the balance each month, so you should be careful when entering into this type of arrangement. If you are irresponsible with this account, it will affect both of your credit scores and could likely cause strain on your relationship with that person.
The primary account holder should check to see how the credit card lender handles reporting an authorized user to the credit bureaus, to make certain that this type of activity will benefit you. Another thing to note is to not fall for scams that claim to help you by adding you as an authorized user to a stranger’s account. These are dangerous schemes that can lead to legal troubles in addition to ruining your credit.
Establish a Joint Account or Co-Sign a Loan
Just like becoming an authorized user could grant you more credit, you could consider setting up a joint account or finding a co-signer for a loan. Similarly to becoming an authorized user, late payments and negative impacts on credit will affect both of your scores. Be certain that you and your co-signer both understand that you are equally responsible for the full payments of these contracts. If one of you is unable to pay, then the other one of you will be forced to make up the difference.
Apply for a Credit-Builder Loan
Certain credit unions offer small loans as a way to help people build their credit. These loans, usually somewhere between $300 to $1000, are secured by the lender in a locked savings account. Over a predetermined amount of time, you make small payments until the loan is paid off. Once that time elapses, and you have paid it off, that savings account is unlocked and you are given access to those funds. Each of your payments on this loan are reported to the credit bureaus in order to help you build positive credit.
Establishing Healthy Financial Habits
As we discussed earlier, the only real secret ingredient to adding positive credit to your credit score is time. To qualify for a FICO score, for example, you must have at least one line of credit open for six months or longer and have activity reported to one of the credit bureaus within the last six months.
It’s okay to start small – anticipate that you will only qualify for small credit limits and loan amounts in the beginning. Once you have established that you can be financially responsible, you can qualify for more. Listed below are some additional financial habits that will help you to add credit.
Make Payments On Time. This is one of the most vital ways to establish good credit is to pay your loan and credit card payments when they are due. Pay every time and pay at least the minimum if you are able. Paying extra will be reflected even better on your credit score.
Keep Your Balances Low. You want to keep your credit utilization ratio below 30%. This is the amount of credit you have compared against your credit limit. The lower that this ratio is across all of your credit cards, the more your score will be positively affected.
Maintain Open Accounts. Closing an open account reflects poorly on your credit utilization ratio and also reduces your overall credit age. Since both of these aspects raise your average credit score, you should avoid doing this if at all possible. If you absolutely must close an account, consider downgrading or transferring it to another card instead.
Refrain from Applying Too Often. Each time that you apply for a new line of credit, your score takes a temporary hit. While this drop is small, too many applications within too short of a time period can severely harm your credit score. Before you apply, research the best offers that fit your needs and try to avoid filling out applications more frequently than about six months apart.
Watch Your Credit Report
Being aware of your financial standing is a crucial part of building credit. You should check your credit scores and reports regularly in order to see what impact your habits are having. More importantly, this will give you the opportunity to discover any errors that may appear on your report. For example, if your credit report shows that you paid something late that you know you paid on time, you can file for a dispute to have it corrected.
Annually, you have the right to request a free copy of your credit report from each one of the three credit bureaus. You should take full advantage of this and look them over for any possible errors. If you find any, you should file a dispute letter to that bureau citing any errors. Provide copies of any proof that you have that shows the information to be incorrect and follow that bureau’s specific guidelines for filing a dispute claim.
Bottom Line: No Shortcuts
In closing, dear reader, there is sadly no quick fix or instant method to add credit to your credit score. It takes time to build a record of your positive spending habits. And it requires dedication and diligence to stick with those habits, even when you may not see improvements for months or longer. However, it really is as simple as establishing a line of credit and paying the bill on time.
Be mindful of credit repair scams that claim to be able to improve your credit score through other means – as these companies have no more privileges than you do regarding your own credit history.
Use these seven tips for helping you to establish good financial habits and to build your credit score higher and higher. Eventually, you will qualify for larger limits and bigger loans and all of your hard work and efforts will be more than worth it.
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