How to Establish Credit

Everyone knows that credit affects your ability to get a loan, secure a credit card, or finance a car. But did you know that your credit can also influence your employment prospects and ability to rent an apartment?

Before you can build credit, you must first establish credit. It’s a tricky catch-22 that can make moving out on your own for the first time feel impossible. Whether you’re still in school or just entering the workforce, this guide on how to establish credit is for you!

How credit works

Credit refers to someone’s creditworthiness or ability to repay a debt. It’s a measure of how reliable you are when it comes to paying your bills. Many lenders determine your creditworthiness based on your credit history, which includes your credit score.

A credit score is a three-digit number ranging from 300 to 850 that indicates whether a person has good financial habits. The higher the number, the more financially responsible you are (at least in theory).

So, how do you get a credit score? First, you need to establish credit.

Why is establishing credit important?

Establishing credit can make it easier to qualify for personal loans, auto loans, and other forms of financing. For example, if you ever want to own a home, you’ll need good credit to apply for a mortgage.

However, credit affects more than just financing.

For instance, most apartment complexes require you to fill out an application before they approve you as a new tenant. One of the things they look at is your credit history to ensure you won’t fall behind on paying rent. If your score isn’t high enough, you may be rejected and need to look for an apartment elsewhere.

Even mobile service providers perform credit checks, which can be an eye-opener if you’ve always been on your family’s plan. In fact, many utility companies require low-credit customers to pay hefty deposits to start new services. This means you’ll probably pay more when opening new accounts for electricity, water, garbage services, cable, and internet.

Ways to establish your credit

There are many ways to start establishing credit. You can:

Get a cosigner

If you don’t qualify for a lease or loan on your own, ask a friend or family member to cosign to establish your credit.

A cosigner is someone who signs an agreement with you, taking equal responsibility for the payments. Since a cosigner is obligated to cover any missed payments – or even the full amount owed if the primary borrower doesn’t pay – you’ll need to be extra mindful of your due dates so that you don’t negatively impact the cosigner’s credit (or your relationship).

Become an authorized user

Did you know that you can establish a credit history before you’re legally old enough to get a credit card? If you’re under 21 and your parent or guardian has good credit, they can add you to their credit card account as an authorized user. Doing so will allow you to start building credit based on their financial responsibility.

Get a secured credit card or secured loan

Secured credit is the way to go when you don’t have an established credit history and can’t get a traditional credit card or loan. Secured credit requires some type of collateral to cover the balance if you can’t pay it back. For example, title loans are secured loans because the lender holds your car’s title until you’ve repaid the debt.

With a secured credit card, you make a cash deposit to open your account, and that deposit becomes your line of credit. You can then charge purchases to your secured credit card up to the amount of your deposit.

Get a student credit card

Many college students start to establish credit with student credit cards. A student credit card is specifically designed to help college-aged borrowers build their credit history. Plus, if you’re spending money on school supplies, textbooks, food, and other college-related expenses, a student credit card can also be a useful tool for managing your budget.

Find gas and retailer credit cards

If you frequent a particular gas station or retail store, see if they offer a retailer credit card. These are great because they often have easier credit requirements than traditional credit cards, and they often come with exclusive store discounts and reward offers. Additionally, they can help to establish your credit.

How long does it take to establish your credit?

Establishing credit can take up to six months or longer. FICO requires you to have at least one credit account open for six months before assigning your first credit score. You also need to use the credit account so that your activity can be reported to the credit bureaus. This involves making regular, on-time payments.

How to maintain good credit

Once you’ve established credit and achieved a good credit score, there are a few things you can do to maintain good credit:

Make consistent on-time payments

When building and maintaining credit, paying your bills on time is of the utmost importance.

Payment history makes up 35% of your FICO credit score, and any late payments are reported to the credit bureaus after 30 days. So, if you struggle to make on-time payments, consider setting up automatic payments.

Keep your credit utilization ratio low

Financial experts typically recommend keeping your credit utilization ratio below 30%. Your credit utilization ratio, or balance-to-limit ratio, shows how much credit you’ve used compared to how much you still have available.

While it may be tempting to max out your credit cards, keep in mind that this can negatively affect your credit score.

Don’t apply for too many accounts at once

You should never apply for multiple credit accounts at once. Doing so can make you look desperate or even suspicious to lenders, who may be more likely to deny your application. More than that, having too many new credit accounts can lower your credit score.

Keep old accounts open

The longer you’ve had a credit account open, the more positive of an impact it has on your credit score. Rather than close any old accounts you’re not using anymore, keep them open so that they show up on your credit history.

Start establishing your credit today

Establishing a credit history can feel like an uphill battle, but it simply takes patience and persistence. Whether you opt for a secured credit card, become an authorized user, or get a co-signer, it all starts with opening that first credit account and making on-time payments.

Did you know that you don’t need established credit to get an Advance America loan? We offer a range of in-store and online loans, including lines of credit and cash advances, so you can get the money you need now. Apply today!