Bad credit can keep you from many things. You cannot buy a home, finance your education or even get a job. You can completely forget about getting a personal loan for a business. On top of that, having no credit is just as awful as having a bad credit score.
What Is Credit and What Is It Used For?
If you are trying to build credit, it is important to understand what it is. It is essentially borrowed money. You can use this money for getting a car, getting affordable internet plans, buying groceries or a new home. While borrowing, you make an agreement to pay back the amount to the lender later. There is usually a fee involved. You are leveraging someone else’s money to make personal purchases.
This history shows that you are a responsible individual when it comes to paying back the borrowed amount. We all need to make larger purchases at some point in life. If you have a credit history that shows a record of accomplishment of borrowing and paying habits, you will face no problems qualifying for those purchases.
Importance of a Credit Score
Before moving on to credit building, you need to know why credit matters. To be honest, it affects your life in ways you could not imagine. This includes:
- Cost of insurance: A bad or no credit means your premiums will be through the roof. That includes premiums of auto insurance, health insurance, and even renter’s insurance.
- Renting an apartment: Landlords these days ask for a credit check. If your credit is not good, this could mean you will not qualify for the apartment, to begin with. You might have to ask someone to co-sign if you really need that place.
- Utilities: Whenever you are about to open an account with a cell phone company, gas/electric company or a cable company, they check your credit. If they find you unreliable, you will have to pay a deposit.
- Getting a job: You must be thinking about what credit has to do with being employed. Unbelievably, some employers have started evaluating candidates based on their credit. They use it to gauge personal responsibility.
In short, without a credit history, you are a nobody. So you better start working on building one right away.
Tips to Build a Credit Score When You Have No Credit
Building credit requires careful planning. These tips will help you with not just building credit (if you do not have one) but improving it too:
- Get a credit card: For starters, make sure you only sign up for one. You borrow money and pay it back on time. This transaction would look great on a credit report.
You will get a secured credit card in case you do not have any history. You have to back it up with a cash deposit. It serves as a guarantee that if you become a defaulter, the lender can use that deposit. Such cards are expensive because you have to pay the deposit up front. Nevertheless, it is worthwhile. It is recommended to sign up for a card with a low credit limit so that you don’t have to bear heavy fee. Once you become regular in making payments, you can trade this card for a better one.
- Pay your bills on time: The best way to do that is to set them to auto-pay. Late payments are reported to the credit bureau and this would look bad on your history. You must not forget that your payment history is used for calculating 35 percent of your credit score. Other than this, these records stay on your score for almost 7 years.
If setting your bills to auto-pay is not viable, then make sure you mark the due dates on your calendar. Plus, paying on time is always a good personal and financial habit.
- Find yourself a co-signer: Got a friend with a great credit score? Convince them to become your co-signer on a loan. As you repay the borrowed money, it will build your credit score. The only problem is if you fail to repay the loan, the other party will be personally liable for it. That is why not many people are willing to co-sign. It damages their credit rating too if they also fail to make payments.
- Get a store card: Retailers are willing to provide branded credit cards to their customers. You can get one even if you don’t have a credit history. These cards are a slow way of building credit. Instead of buying with cash, buy on credit. Pay the entire outstanding bill by the end of the month. Make sure you are not buying more than what you can repay. Ask the retailer to report your history to the credit bureau.
- Reduce your debt: The single best thing you can do for improving your credit is to owe less. Just because you are encouraged to get a credit card doesn’t mean you drown yourself in debt. Be careful with what you borrow.
Long story short, you have to have a credit history. It’s never too late to start building one. Once you start putting the work in, you will be surprised to see how quickly the numbers tick up. By the time you want to make a large purchase or get a loan for live trading or any other investment, you won’t have to face any rejection.