If you want to build your credit, consider these strategies:
Get a secured credit card. These cards are designed for people with no or poor credit. To get a secured credit card, you must make a deposit with the bank that issues the credit card. Often it is around $500, which is also generally the credit limit. The credit limit is the maximum you can charge on the credit card.
What to watch out for:
Fees. Secured credit cards often have fees: annual fees, monthly fees, and others. While credit card issuer cannot charge fees that add up to more than 25 percent of the credit limit in the first year, read the fine print. Make sure the fee structure does not change and increase after the first 12 months. Look for card with no annual or monthly fees.
Credit utilization rate. Be sure to keep the amount you charge below 25 percent of your credit limit. Even if you pay off your credit card each month and do not carry a balance. Why? Your credit score will be harmed if you use too much of your credit limit. So, if your credit limit is $500, never charge more than $125 on your card.
What to watch out for:
Reporting. Check to ensure the financial institution (credit union or bank) regularly reports your payments to a consumer-reporting agency (Transunion, Equifax or Experian).
Get a credit-building loan. These installment loans are structured in different ways at banks and credit union. Generally, they are small loans generally $1000 or less that you repay through regular, scheduled payments over 6 months to a year. Often, credit unions and banks require the loan to be secured with an amount equal to the principal of the loan in a savings account or certificate of deposit. In some cases, the amount you borrow if out into a secured account from which you make regular payments plus interest. If you default on the loan, the credit union or bank will seize the deposit to cover the loan.
What to watch out for:
Interest rates. Most loans require you to pay interest. Be sure the interest rate is affordable for you. Remember, even if the loan is placed in a deposit and you make the loan payment from this deposit, you will still need additional money to cover the interest. Be sure to compare the rates at banks, credit unions, and nonprofit community development financial institutions in your community.
Missing payments. While regular, on-time payments can build your credit, missing or late payments will harm it. Be sure you can handle the payments before taking on this loan. Or chose a loan where the loan repayments are made automatically.
Reporting. Check to ensure the financial institution (credit union or bank) regularly reports your payments to a consumer-reporting agency (Transunion, Equifax or Experian).
Become an authorized user on an account. This provides you with a credit card in your name, but someone else owns and is responsible for the account.You can use the card and as long as the primary accountholder uses it responsibly and has good credit, it may provide a slight boost to your credit.FICO, the most widely used scoring model, has decreased the affect that authorized user status has on credit scores.This should be considered a secondary way to build your credit.
What to watch out for:
Reporting. Check to ensure the financial institution (credit union or bank) regularly reports authorized user status the consumer-reporting agencies (Transunion, Equifax or Experian).
Missed payments by the account owner. Late and missed payments on the account can affect your credit. Make sure the person who owns the account has good credit.
Pay all of your bills on time and as agreed. This is the most important strategy for building credit. Over time, paying all of your bills on time and as agreed will build your credit. But, you must have accounts that are generally reportable to a credit-reporting agency—loans, credit cards, and charge cards. If you miss utility bills, rent payments, cell phone payments, payments for child support, parking tickets, and so on, these could also show up as negative entries on your credit reports. And, they may make your scores drop.