So much of our financial lives is dictated by our credit scores, from the interest we pay on our credit cards, to what kind of car loans and home mortgages we qualify for, and even what apartments we are able to rent. That’s why knowing how to build credit has become an essential skill for the world we live in today – although it’s one that’s not often taught in schools.
Here, we’ve written up a guide on how to build credit fast, so you can qualify for that car loan, lock in that mortgage, and start living the dream.
One of the best moves you can make to start building credit is getting a credit card. Your credit rating is based on your perceived trustworthiness as a borrower, and responsibly holding a credit card is one surefire way to demonstrate that you know how to borrow wisely.
Now, it’s not quite enough just to have the card in your possession; you’ll have to use it from time to time. Otherwise, the card issuer could choose to close your account after so much inactivity, and your credit score could actually take a hit. As a rule, if you’re really trying to build your credit, try and keep your utilization ratio – that is, the percentage of your credit limit that you actually hold as a balance – below 10%. (For example, if your credit limit is $10,000, you’re best off if you keep your balance below $1,000.) Better still, try to make relatively small purchases regularly and pay off your entire credit card bill at the end of each month. Do this long enough and the credit bureaus, which receive reports on lenders all across the country from banks and credit card issuers, will determine that you’re a smart, dependable borrower who can generally be trusted to pay back your debts, and your credit score will rise as a result.
And if you don’t qualify for a traditional credit card, whether due to limited credit history or a poor score, remember that you can always try to qualify for a secured credit card – a special type of credit card where you pay a refundable deposit to open the account, where your credit limit is equal to the deposit you pay.
If you absolutely can’t qualify for your own credit card, becoming an authorized user on a family member’s card account can still help you build credit. As an authorized user, you won’t be responsible for paying the bill on time each month, but so long as the person you’re pairing with keeps up with the balance and pays at least the minimum amount on time, you’ll still see an improvement to your credit score – although the impact won’t be as big as if you had a card of your own.
This is in fact the only way for anyone under the age of 18 in Canada or the US to hold a credit card, but it means that even minors can get a head start by beginning to build credit with a card before they’ve reached legal adulthood. Just be sure to stick to whatever agreement you’ve made with the originator of the credit card account; you don’t want to burn any bridges.
The term “instalment loan” applies to any line of credit with a set starting principal and a fixed monthly payment – things like car loans, mortgages, personal loans, and student loans. In fact, student loans are another great tool for younger people to start to build a credit history. Taking out loans such as these, and then paying them back gradually, without missing any payments, is an excellent way to prove your trustworthiness to lenders.
Granted, you should generally stay away from taking out loans you don’t really need; borrowing costs money in the form of interest, and while your credit score might get a boost as a result of an installment loan, you still have to factor that in. But if, say, you’re shopping for a pre-owned car and you could buy one outright, but that would leave precious little in your bank account for covering next month’s expenses, the boost to your credit history is an extra incentive to take out a loan. And if you have trouble qualifying on your own, consider getting a family member or trusted friend with established credit to serve as a cosigner.
As silly as it may sound, if you already have a credit card or two, getting a credit limit increase on your cards can help boost your credit score. Remember: your score at any given moment is largely determined by your utilization ratio – the amount of your credit limit that you actually have as a balance. Therefore, raising your limit automatically means that your existing balance represents a smaller utilization ratio, making you look more responsible as a borrower. Whether or not you will be approved for a limit increase will largely come down to your score and credit history, and possibly your monthly income, so we only recommend this for people who are reasonably confident they’ll qualify for an increase in the first place.
When it comes to how to build credit fast, there are plenty of steps you can take, and chances are strong that you’ll end up doing many of these things regardless, just in the course of making your way through life. But no matter how you end up going about building credit, just remember to always borrow responsibly, do everything in your power to never miss a payment, and never take out a line of credit you’re not confident you can eventually pay back.