Best Way to Build Credit When You Are Just Starting Out
Ask anyone new to credit and they will tell you that they don't know where to start or what is the best way to build credit. It can be quite a perplexing situation. Primarily, the confusion stems from the fact that it often takes credit to get credit. What's a credit newbie to do?
Well, don't despair. All is not lost. There are several things you can do to establish credit. Some are even creative approaches. Nevertheless, these steps are sure to get you started on your credit journey. Understand that learning and practicing good credit card use and behaviors is the best way to build credit.
Building Credit 101
The term credit is a word that's thrown around a lot but many people may not truly understand what it means and what it is. Essentially, credit is a form of a loan. You are borrowing a bank's money to make purchases with the promise to pay them back at a later date, either in full or over time. Credit cards work using this concept. Your credit card allows you to make purchases using someone else's money with the agreement that you will pay this money back. Most loans have some form of interest.
Interest is the extra money that is added to the original amount that you borrowed and must be paid back with the original amount. Credit cards differ in that you can make interest free purchases if the total amount spent is paid in full by the due date. This concept allows you to make purchases without worrying about interest if you pay the entire amount you spent. This concept of credit is simple and comprehensive: You borrow...you payback. How you do this is up to you. If you'd like to borrow without worrying about accruing interest, you simply pay back the amount you borrowed in full.
This explanation is the simple concept of credit. However, it can be quite involved when the various terms and conditions of different credit card companies come into play. Some credit card companies offer variable interest rates that change according to the market. Others may offer a fixed rate that stays the same over time. The complexities don't stop there, however. There are more. Some credit card companies have an annual fee that they charge all of their credit holders, while others may not have this fee. Some credit card companies may charge late fees as well. This is why its a good idea to read the fine print and understand what you're saying yes to before you say yes.
However, not all of the complexities of credit cards ar negatives. Some extremely beneficial perks come with using credit cards. Some cards offer money-back on certain types of purchases or all purchases. Other credit cards may offer you mileage or other incentives. There's a lot to choose form. This is why it's a good idea to take your time and explore all of your options. Keep in mind, however, that mishandling any or all of the terms of your credit can reflect negatively on your credit record.
The Secured Credit Card
A secured credit card is an excellent way to build your credit history. Many of these cards don’t require you to have a credit history at all. You simply apply for the card and submit the required deposit. Your credit limit is usually based on your deposit. Some companies may require you to have a checking account or have a requirement to auto-draft payments from your checking account. However, the terms will vary depending on the credit card company.
This method is effective because these credit cards usually operate just like any other credit card. They report to all three credit agencies. This means that your on-time payments will reflect well on your credit history and not only allow you to build credit but to build good credit. Another perk is that you can often get your credit limit extended if you successfully make your payments on time. Also, the deposit is usually refundable, which is also a perk. Secured credit cards allow you to establish credit when you have none. If you’re trying to find best way to build credit, definitely consider this.
Student Credit Cards
Another option for credit building, if you are young and attending college, are credit cards geared towards students. These credit cards are geared towards young people and are designed to give young people with little or no credit an opportunity to establish credit. The terms and perks of these types of credit cards can vary greatly. As a result, you'll need to do your homework and find one that suits your personal needs. These types of credit cards can be excellent opportunities because they allow young people to practice responsible credit card use by making on-time payments and managing their spending. Many of these cards also offer educational benefits to teach young people about responsible credit card use.
Fingerhut and Store Creditors
Another option for establishing and building credit is credit card accounts like Fingerhut. This type of credit is usually not as difficult to obtain and allows people with poor credit or little to no credit to purchase products and pay for them over time. Like other conventional credit cards, this type of credit is also reported to all three credit agencies. This provides newbies or those with blemished credit an opportunity to build credit by making on-time payments and handling their credit responsibly.
This type of revolving credit allows you to purchase products from a particular retailer and provides you with a credit line. This type of credit is similar to store credit cards like JC Penney, Victoria Secrets, Target, and Walmart in that they provide you with a credit line and allow you to make purchases from that particular store. Many of these types of credit cards will also allow you to purchase items from other stores and work as a standard credit card when they have a Visa/Mastercard Logo.
Conventional Credit Cards
Sometimes, people who are just starting their credit journey can get lucky and attain a conventional credit card without a deposit. These credit cards can be golden opportunities for people who are just starting with credit. However, buyer beware. If you can get a conventional credit card without a deposit, you have been offered a rare opportunity and this opportunity should be used to prove your creditworthiness. Don’t overspend and make your payments on time.
Your monthly minimum payment will be a percentage of your credit limit. Make sure you make this payment on time every month. It will reflect well on your overall credit and prove that you can handle credit responsibly. This is very attractive to credit card companies and the number of credit offers you receive will grow. In essence, you should create all credit with respect. You are essentially borrowing money from a bank with the promise to pay this money back on time. Honor your agreements and your opportunities will continue to expand.
Finally, if you decide you want to open a credit card, below you can find the best options that are out there and pick the one that works for you:
Creative Measures
In some circumstances, utility bills and other nonconventional payment accounts can be used to improve your credit. Some utility companies will report your on-time payments to credit agencies, therefore boosting your creditworthiness. However, this is not always a guarantee. Nevertheless, it may be an option if you pay utilities responsibly. It is something that you can inquire about. Keep in mind that in the beginning, every little bit helps. Positive on-time payments that are reported regularly can help improve your credit. Other payments that arent usually reported may be an option as well. When in doubt ask. This may be an option.
A Few Big Considerations When it Comes to Applying for Credit...
Many newbies may not understand what a credit inquiry is. The concept is simple. An inquiry is simply an attempt or application for credit. It's the way potential credit users ask a credit card company for credit. This process usually involves an application and a waiting period. More often than not, the waiting period is relatively short and most people can get the results fairly quickly.
If you are not approved for a credit card the company usually sends you a notice detailing the reasons why you were not approved. However, beware. One rejection notice won't hurt you too much. However, if you're consistently applying for credit cards and getting turned down, this reflects poorly on your credit. This is one of the main reasons why you should apply for credit cards that you have good odds of getting.
Inquiries subtract from your credit score, particularly when there are too many and no new credit has been extended to you. Apply for credit sparingly and choose wisely. Don't seek premium credit designed for people with a well-established credit history when you're just starting. The odds are against you. More than likely you will be rejected. Conversely, many credit card companies may offer pre-approval which shows up as a soft inquiry. even preapproval offers may be a wiser choice if you're not sure if you'll be approved or not.
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Good Credit Manners
We have explored good credit practices about any form of credit. However, there are many more factors to consider when it comes to handling credit responsibly. For example, maxing out your credit cards, or spending every dime of your allotted credit is never a good idea. This can be particularly bad if you've done this with all or most of your credit cards. Creditors frown on this type of behavior. This is amplified particularly if you're seeking more credit. It may even give the impression that you are trying to live off of your credit cards and that you can't truly afford them. This type of behavior is truly a no-no. Also, it's not a good idea to rely on cash advances and other high-interest practices to keep you afloat.
Creditors look at your credit behavior and also look at all your lines of credit and how they are handled. Also, because creditors usually don’t have access to income information, they look at how much credit you have available in comparison to your overall credit. This may be confusing to understand. However, it's simple. If you have a credit card with a two thousand dollar credit limit and you have spent almost seventy-five percent of your allotted credit, you have very little available credit to use. Imagine having six credit cards and the credit usage is almost seventy-five percent on all of them. This doesn't look good to creditors.
How Creditors Evaluate Your Credit
One thing many credit users don’t understand is how creditors look at your credit profile. On-time payments and a good credit history account for thirty-five percent of how your credit is perceived. This goes to show you just how powerful making your payments are when it comes to affecting your credit and how it looks to creditors. This is the largest piece of the credit puzzle and should be handled accordingly.
Sometimes, people who are just starting their credit journey can get lucky and attain a conventional credit card without a deposit. These credit cards can be golden opportunities for people who are just starting with credit. However, buyer beware. If you can get a conventional credit card without a deposit, you have been offered a rare opportunity and this opportunity should be used to prove your creditworthiness. Don’t overspend and make your payments on time.
Your monthly minimum payment will be a percentage of your credit limit. Make sure you make this payment on time every month. It will reflect well on your overall credit and prove that you can handle credit responsibly. This is very attractive to credit card companies and the number of credit offers you receive will grow. In essence, you should create all credit with respect. You are essentially borrowing money from a bank with the promise to pay this money back on time. Honor your agreements and your opportunities will continue to expand.
This is another reason why you should only handle credit that you can handle responsibly. You may ask what this means and the answer is quite simple. Don’t bite off more than you can chew. Live within your means. This applies to your credit usage as well. If you can't afford to carry a ton of credit cards, use all of them, and pay on the balances monthly, or pay them off, don't get them. Use what you can responsibly handle. This is simple yet powerful advice and one of the Best way to build credit. However, this will not only help you to build credit. This will also help you to build good credit, which is even more important.
Bad Credit Manners
Unfortunately, not all of us were taught good credit manners and usage. Many of us had to learn the hard way that mishandling credit can have long-lasting effects not easily fixed. As a result, It's a good idea to become just as familiar with poor credit behaviors as good credit practices. Even if you found the best way to build credit, bad credit manners can destroy it.
For starters, don’t acquire more credit than you can responsibly handle. This will not be the best way to build credit. Too much credit, before you can handle it, usually results in missed payments and the inability to make all of your payments. You may find yourself juggling, making some payments ion time, some not at all, and some late. This doesn't look good at all and is a sure way to destroy your credit in a hurry. Only acquire as much credit as you can handle responsibly. This is the yellow brick road to good credit and the best way to build credit.
Another silly practice when it comes to destroying your credit is applying for credit all the time. Inquiries can tank your credit score, especially when you're not getting approved by the creditors you're applying to. Don't do it. One of the best ways to gain credit intelligence is understanding how the pieces of the credit wheel work. Take charge of your education and learn as much as possible before you dive into your credit journey. Your education will light your credit journey and help keep you on the straight and narrow. You may make mistakes but you will quickly get back on track with the right education followed by responsible behavior.
Final Thoughts
Without a roadmap, it's hard to get anywhere, particularly if you don't know where you're going. This is one of the many reasons why the road to good credit should always begin with education. This is especially true for newbies or rather, people new to credit card use. This is an area that can get you into hot water fast, particularly if you are ignorant of how credit works. Arm yourself with knowledge and measure your steps carefully and wisely. There is a wealth of good information out there if you'll just take the time to do your homework. Don’t neglect your financial health. Credit card use is a huge part of your financial health.
A strong roadmap shows you the best way to build credit. This roadmap is your credit education which is a vital key to your overall credit health and longevity. You may make mistakes as a newbie, but you'll pick yourself up a lot faster with the right education under your belt. Do the work, go the distance, and put on the full armor of credit health and power. You can do it! It's not difficult. It just requires time and purposeful action. Your education and proactive action combined is the best way to best way to build credit, good credit.