Starting over or starting from scratch with your credit? Here’s the best advice: Be patient. Building up a brand-new credit history or re-establishing credit after some credit missteps takes time. You’ll want to give yourself at least a year to see some progress with improving your credit.
Not sure where to start? Payment history — the biggest influencer of your scores — accounts for 35% of a credit score and is one of the easiest ways you can control the effect your financial habits have on your scores. Establishing or re-establishing your credit with a solid year of on-time payments on a credit account can really make a difference on your scores. Here are three ways you can work on building good credit.
1. Build Credit With Secured Credit Card
A secured credit card is a good credit-building option. With a secured card, you make a deposit to the card issuer, and that deposit becomes your credit limit. Before you sign up for a secured credit card, it’s a good idea to compare the cards on the market and find the one that will work best for you and your budget. Some things to consider include if there is an annual fee, if any rewards are offered and if the required deposit works with your budget.
It’s also good to read the finer details that accompany the card. For example, find out if you’ll be able to advance to an unsecured credit card after responsibly using your secured credit card for a given period of time. Also, seeing as you’re using this card to help you build credit, it’s a good idea to choose a secured card from a lender that reports to all three major credit reporting agencies — Equifax, Experian and TransUnion. This way, you’ll see an effect on your scores across the board.
To build credit with a secured card, the best practice is to make a series of on-time monthly payments and also maintain a good credit utilization ratio (the amount of debt you carry in relation to your total credit limit). Experts recommend using no more than 30% of your total credit limit, ideally less than 10%, to see the best effect on your scores.
2. Take Out a Credit Builder Loan
Another credit building option is to apply for a credit builder loan, which are typically offered by smaller lending institutions, like community banks or credit unions. These loans can be good credit building tools in their own right.
With a credit builder loan, the money you borrow is placed in a savings account. And once you pay off a credit builder loan through a series of payments over the course of the given term, often six- to 18-months, you will get access to the money in the savings account.
Loan amounts for credit builder loans can be small, some even just $500, so you won’t need an immense amount of money to use this tool to help you build your credit record. Again, if you go this route, it’s important to choose a credit builder loan from a lender that reports to all three of the major credit reporting agencies.
3. Become an Authorized User
If you’re looking to build your credit quickly, you may opt to become an authorized user on someone else’s credit card. Doing so can get you access to a credit card you may not otherwise qualify for, as well as help you build credit history in the process. Just make sure you and the original cardholder discuss terms for being on their account. Even though an authorized user isn’t legally responsible for making payments on the card, you don’t want to ruin a relationship (or damage both of your credit profiles) by racking up excessive charges on the account.
As with everything else we’ve mentioned, it’s a good idea to make sure the card issuer reports to all three of the main bureaus to ensure you’re getting the most out of this tool.
Keep an Eye on Your Credit
As you work on improving your credit, it’s a good idea to see how your scores are adjusting. You can monitor your credit scores for free through Credit.com. When you have your free account on Credit.com, you’ll receive two free credit scores, plus a personalized plan to help you get an idea about what steps you can take to improve your credit. And thanks to the frequent updates, you will be able to see how your credit score is progressing on a regular basis.