As a young person moving into the early stages of adulthood, good credit can be important for your financial well-being. Even something as simple as getting a cheap apartment can be difficult without a history of good credit. But all hope is not lost.
You can implement a few simple steps to make sure that your spending and credit are healthy. Here are four ways to build credit so you can have more financial freedom.
The first step toward financial security is simple: create and maintain a budget. You can’t live without part of your paycheck set aside for necessities. You’ll also want to set aside money to pay off debt, cover unexpected expenses, and have a little fun, too.
Take a step back to assess your finances, including both money coming in and money going out. Fixed expenses like rent and utilities are at the top of your must-pay list. Then, paying off debt should take precedence over other non-essential expenses when building credit.
Once you know how much to budget for those two categories, you’ll have a better idea of how much you can spend. These numbers help to clarify your situation so non-essentials don’t deplete your bank account.
At this point you can choose what to do with these funds, but take great care not to exhaust them. Using cash is a responsible preventative measure; that way, you can only access money you have. Even with this in place, saving a certain amount each month is highly recommended and adds up over time. In the event of an impending loan payment or emergency, you’ll have money ready to go.
Once your budget is in order and you can afford monthly payments, consider applying for a credit card. You should find one with the lowest interest rate possible. Keep in mind, though, that if you have no or poor credit, interest rates may be higher for you.
Instead of using your money when you make a purchase, it will take it out of your monthly limit. Then, you will have to pay back the balance you spent at the end of the month. This is useful if your earnings are inconsistent, but can also cause you damage if you’re not careful. Be sure not to use the credit card too much each month. Keeping usage below 30% of your available credit will help keep your credit score in check.
Receiving approval for a card can be quite difficult without good credit. If you get denied, consider a credit card that allows for a co-signer. This would allow somebody you know (who has good credit) to present their credit for approval as well.
Still, this is not the easiest route because many companies do not allow for co-signers. Alternatively, you could have this person add you to their card as an authorized user. Doing so will allow you to use their credit to boost yours.
Another option is to sign up for a credit builder card. While unsecured credit cards are difficult to get approval for without good credit, credit builder cards are not. They require an up-front deposit that ensures that the bank can receive payment should you miss a month.
For a lower barrier to entry, look into applying for a credit-builder loan if you have enough savings. Smaller financial institutions are more likely to offer them, and you do not need good credit to apply. These loans are designed to help boost credit for those with a spotty or nonexistent credit history.
Once you have been approved (and paid the necessary fees), the bank deposits the loan amount into an inaccessible account. It will not be released to you until you’ve paid it off in full.
Credit-builder loans are an opportunity to make consistent payments without losing much money, if any. Institutions agree to take part because it’s not a risk to them, either. They do not relinquish any money until the end, and at that point, you have already paid it off. If you are unable to pay a bill, the bank can take it out of the loan. This is not without credit consequence for you, however.
These loans also provide the added bonus of helping you save by keeping the amount untouched during your payment period. In the end, it might be more than you would have saved in that time without it.
With your monthly budget planned out, don’t be afraid to set up automatic payments for your bills, especially for debt. Having a budget reduces uncertainty in this regard. Your credit will improve when automated payments are made on time.
Credit-builder loans, for example, are an effectively effortless means to financial security when paid automatically. If you begin to make more money, you should put even more toward paying off debt to build credit faster.
Punctual, consistent payment reflects in your credit and shows institutions that you are a reliable property or loan recipient. You’ll have an easier time getting approved for loans on cars, homes, and other large investments.
Disappointingly, other charges you pay each month such as internet, utilities, and rent, often are not reported to credit bureaus. You can, however, take advantage of bill-reporting services that will do so. While the effect on your credit will not be as tangible, it can make a worthwhile difference.
Putting some thought into building credit early can give you the confidence that your finances are on the right track. Trust yourself and make the commitment to keep up with your money and spend it wisely. Just a few months of paying bills on time can translate to a marked improvement in your credit score.
Creating and maintaining a budget, growing a credit history, and leveraging automatic payments are all vital to your financial future. Taking these simple steps now will provide lasting benefits and put you on the road to financial freedom.
1. Budget and Live Within Your Means
The first step toward financial security is simple: create and maintain a budget. You can’t live without part of your paycheck set aside for necessities. You’ll also want to set aside money to pay off debt, cover unexpected expenses, and have a little fun, too.
Take a step back to assess your finances, including both money coming in and money going out. Fixed expenses like rent and utilities are at the top of your must-pay list. Then, paying off debt should take precedence over other non-essential expenses when building credit.
Once you know how much to budget for those two categories, you’ll have a better idea of how much you can spend. These numbers help to clarify your situation so non-essentials don’t deplete your bank account.
At this point you can choose what to do with these funds, but take great care not to exhaust them. Using cash is a responsible preventative measure; that way, you can only access money you have. Even with this in place, saving a certain amount each month is highly recommended and adds up over time. In the event of an impending loan payment or emergency, you’ll have money ready to go.
2. Sign Up for a Credit Card
Once your budget is in order and you can afford monthly payments, consider applying for a credit card. You should find one with the lowest interest rate possible. Keep in mind, though, that if you have no or poor credit, interest rates may be higher for you.
Instead of using your money when you make a purchase, it will take it out of your monthly limit. Then, you will have to pay back the balance you spent at the end of the month. This is useful if your earnings are inconsistent, but can also cause you damage if you’re not careful. Be sure not to use the credit card too much each month. Keeping usage below 30% of your available credit will help keep your credit score in check.
Receiving approval for a card can be quite difficult without good credit. If you get denied, consider a credit card that allows for a co-signer. This would allow somebody you know (who has good credit) to present their credit for approval as well.
Still, this is not the easiest route because many companies do not allow for co-signers. Alternatively, you could have this person add you to their card as an authorized user. Doing so will allow you to use their credit to boost yours.
Another option is to sign up for a credit builder card. While unsecured credit cards are difficult to get approval for without good credit, credit builder cards are not. They require an up-front deposit that ensures that the bank can receive payment should you miss a month.
3. Apply for a Credit-Builder Loan
For a lower barrier to entry, look into applying for a credit-builder loan if you have enough savings. Smaller financial institutions are more likely to offer them, and you do not need good credit to apply. These loans are designed to help boost credit for those with a spotty or nonexistent credit history.
Once you have been approved (and paid the necessary fees), the bank deposits the loan amount into an inaccessible account. It will not be released to you until you’ve paid it off in full.
Credit-builder loans are an opportunity to make consistent payments without losing much money, if any. Institutions agree to take part because it’s not a risk to them, either. They do not relinquish any money until the end, and at that point, you have already paid it off. If you are unable to pay a bill, the bank can take it out of the loan. This is not without credit consequence for you, however.
These loans also provide the added bonus of helping you save by keeping the amount untouched during your payment period. In the end, it might be more than you would have saved in that time without it.
4. Organize Your Payments
With your monthly budget planned out, don’t be afraid to set up automatic payments for your bills, especially for debt. Having a budget reduces uncertainty in this regard. Your credit will improve when automated payments are made on time.
Credit-builder loans, for example, are an effectively effortless means to financial security when paid automatically. If you begin to make more money, you should put even more toward paying off debt to build credit faster.
Punctual, consistent payment reflects in your credit and shows institutions that you are a reliable property or loan recipient. You’ll have an easier time getting approved for loans on cars, homes, and other large investments.
Disappointingly, other charges you pay each month such as internet, utilities, and rent, often are not reported to credit bureaus. You can, however, take advantage of bill-reporting services that will do so. While the effect on your credit will not be as tangible, it can make a worthwhile difference.
Putting some thought into building credit early can give you the confidence that your finances are on the right track. Trust yourself and make the commitment to keep up with your money and spend it wisely. Just a few months of paying bills on time can translate to a marked improvement in your credit score.
Creating and maintaining a budget, growing a credit history, and leveraging automatic payments are all vital to your financial future. Taking these simple steps now will provide lasting benefits and put you on the road to financial freedom.
