Many of us know that being in debt is typically a bad thing from a very young age, but do we know why? Unfortunately, credit scores are not often discussed, so they may come as a bit of a shock to those who have just turned 18 and are looking to start building credit.
Your credit score has a significant impact on many areas of your life. It affects things such as buying a house, getting a credit card, and getting a loan. So, it is crucial always to keep it in mind when going about your everyday business.
Here we will tell you tips to build your credit score without going into debt.
What Is a Credit Score?
Your credit score is a three-figure number that indicates how likely you are to be a safe bet when it comes to loans. Essentially, it lets lenders know whether you are a risk. The higher the number, the better your credit score and the “safer” you are considered.
Your credit reports determine your credit score, but if you had never had to pay anything in your name, then it’s common to have little to no credit history.
Building a Credit Score
There are many ways to go about building a credit score, but some are better than others. For example, many people will tell you to get a small loan and pay it off when due simply to prove that you can do so. However, things are not always certain in life. What may not seem like a risk at the beginning can indeed become one.
So, how do you build a credit score without debt?
Sign on as a Co-Holder’s on a Family Member’s Credit Card
One of the quickest and easiest ways to get a credit score is to be a co-holder of a credit card. For example, if your parents are willing to let you do this, you can be added as an authorized user to their account. Once you are approved, the payment history will lend itself to your credit score. Essentially, you get a boost in credit score with no work.
It is better to become an authorized user on a trustworthy person’s credit card.
The last thing you would want to happen in this situation is that they make a late payment or even fail to make one altogether. This would then, of course, negatively impact your credit score through no fault of your own.
Open Your Own Credit Card
Perhaps a safer way to boost your credit score is to get a credit card with just you as an authorized user. This way, you won’t be reliant on anyone else’s spending habits for your credit. Of course, most credit cards will require you to have a good credit score already before they approve you. However, one option is a secured credit card.
A secured credit card needs a security deposit. The amount of money that you deposit with them is your credit limit. Essentially, it’s insuring you against yourself. You need to treat it like a typical credit card and pay the amount off when it’s due to receive your deposit back.
However, remember that failure to pay the sum or even a late payment negatively impacts your credit score. It also means that the lender keeps your security deposit to recover the money that you spent.
Set Up Autopay
The easiest way to quickly accumulate bad credit is to make a late payment. Your payment history makes up 35% of your credit scores, and so paying late does significant damage. In addition, late payment even just once can result in you being reported to the three main credit bureaus.
This report of late payment will then stay on your record for up to seven years. So, to avoid this, you should consider setting up autopay. It means that the amount owed will be automatically deducted from your account each month.
You can always keep a record of the amount spent and check it yourself against the amount automatically deducted to ensure that you are not being overcharged.
Get a Credit-builder Loan
A credit-builder loan is not your average loan, but it is designed to help people build up their credit scores. With this type of loan, you will need to place money into an account every month. When the set period is up, you will receive the total sum of your deposited money (possibly plus interest) minus fees.
What you are doing shows that you can be trusted to pay a certain amount of money by a certain deadline. Additionally, it demonstrates to companies that you are trustworthy and can keep your money in order.
To Sum Up
A credit score has a significant impact on daily life, but it is often overlooked when we are children. The importance of building up a good credit score cannot be stressed enough. However, many people state that getting a loan is the best way to go about this. Unfortunately, that is not always the case, as any form of a loan carries risks.
Instead, we have listed above some of the best alternative ways to build up a good credit score without the need to take out a loan. Each of the methods listed above still carries a small amount of risk, and it is up to you to decide which way is the best for you.
If you need to rely on someone else to get your credit scores, then becoming an authorized user is a great way. However, remember that you are reliant on someone else. Otherwise, lenders will insure you against yourself. Be sure to do you homework before opening a credit card.
Image credit:[Margo Hercules].