Building Credits. If you start building credits at a young age, it can launch you into a lifetime of good financial habits and good financial rewards. Learning how to get credit at a young age, say 18 should be a priority for young financial consumers. This can help them build the financial foundation that they need to build a solid savings oriented financial future.
What is Credit?
Credit is the term used in describing how consumers can gain access to things like loans and credit cards, usually from banks, credit unions, mortgage as well as auto lenders, credit card companies, online lending platforms, as well as other financial institutions.
These lenders use credit scores calculated by Fair Isaac (FICO), which makes use of a scoring system ranging from 300 at the low end to 800 at the high score. Also, there’s another company known as VantageScore, which also offers a credit scoring model for consumers.
Credit reporting agencies like Experian (EXPGY), Equifax – Get Report, and TransUnion (TRU) -Get Report to track your credit history and in addition to using the FICO – Get Report model, assign a credit score as well as a credit history to a consumer. A lender, on the other hand, accesses and reviews the credit history of a consumer before deciding if the consumer is worthy of being issued a credit.
How To Start Building Credits at a Young Age
Get a Low-limit Credit Card
Building Credits. If you charge small items to a credit card and then pay it off in full every month, you are bound to build credit in no time. You can find these offers at creditcards.com and other similar sites, with most offering cards with a $300 limit or thereabout. Ensure to charge $50-$100 per month on it, and don’t max out the limit. Thereafter, pay the balance in full. Your credit rating will increase rapidly within just a few months.
Set Up Automatic Payments
Understand that when it comes to building credit, making late payments is one the worst thing you can do. It is important that you make all of your payments on time and in full. Instead of leaving making your on-time payments to chance, you can set up automatic payments whenever possible.
Keep Paying Old Bills
If you have years of on-time payments and the age of the account will boost your score. An account in good standing is factored into your score until. 10 years after it has been paid off and closed thus you can’t. Afford to miss payments.
Understand Your FICO Score
Your FICO score is determined by the following:
- Your payment history – 35%
- Credit utilization – (amount owed vs. total available credit): 30%
- Account age/length of credit history – 15%
- New accounts/hard inquires – 10%
- Credit mix/type of credit used – 10%
The VantageScore, which is also another consumer credit rating system. Uses similar criteria, although in a slightly different formula. Developed by three credit reporting agencies (Experian, Equifax, and TransUnion).
Notably, the most important factors are establishing a history of. On-time payments to all creditors and keeping debt low in relation to the amount. Of credit available to you (known as the credit utilization ratio).
Check With Your Utility Company
Most utility providers only report derogatory information to the credit bureaus. However, if you reside in Detroit, and you pay your bills on time, then you are in luck. DTE Energy reports all payment histories, be it positive or negative. Consumers that have a responsible habit of paying their bills on time benefit from responsible management of this household expense.
If you are not in Detroit, you can contact your utility provider to find out if it reports to the credit bureaus, and if it reports, put the bill in your name. If your utility provider does not report to the credit bureaus, you can still use the positive payment history to your advantage. Most utility providers are quite excited to offer a letter of reference for an account holder in good standing.
Take a Loan
By borrowing money and paying it back on time, you can prove that you are a good credit bet. Most loans are being reported as installment accounts, and the credit reporting agencies want to see that you can handle one responsibly.
You can go to your bank and inquire about a small personal loan. If you do not qualify for a traditional unsecured loan, you might qualify for a loan secured with collateral, like funds in a Certificate of Deposit account that you cannot withdraw while the loan is outstanding.
If the banks are not an option for you, you can engage many peer-to-peer lenders like Prosper and Lending Club to report to the credit bureaus. They also have higher approval rates than banks.
Open a Store Credit Account
There are many stores that offer credit accounts. Most are reported as revolving credit, the same as a credit card. Home Depot offers project loans and many local home improvement stores also offer credit accounts, and some are available with the payment of a deposit in lieu of good credit. Staples office supply store on the other hand has several credit products, which includes a personal credit account administered by Citibank. However, before you apply for store credit, ensure the vendor reports to the credit bureaus.
Bear in mind also that some credit cards are better than others for people with poor credit scores, while others can help individuals recover from poor credit.