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5 Tips to Help Build Your Credit Through Responsible Borrowing

26th May 2020 Print
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Building positive credit is a crucial part of your life as it unlocks financial opportunities. This is especially true for first-time homeowners, aspiring college students, if you're thinking about making a big purchase, or taking out a personal loan.

Lenders and credit card companies make decisions about the creditworthiness of borrowers based primarily on credit scores and credit reports, which are the two ways to evaluate an applicant's credit history.

The score on your credit history is what determines if you qualify for a home loan, mortgage, auto loan, credit cards, and at what interest rates. In some cases, landlords and employers also check your credit report before approving a residential application or making a job offer.

There are quick, expert-approved ways to build your credit and establish a positive credit history.  And if you lay the foundation for responsible financial habits, you can ensure you will continue to build good credit.

1. Get a Credit Card and Use It Responsibly

Credit cards are excellent and powerful tools to build your credit. If you use your credit card responsibly, they offer valuable rewards and benefits, and of course, a convenient method of payment. However, if you have a limited credit history, it's best to look for a credit card with a low spending limit. 

Also, only make the charges that you can readily pay, immediately after spending or in full every month, by the due date. By doing so, you'll build your credit report of responsible credit use and reliable payment.

2. Get a Secured Credit Card

Are you building your credit from scratch? You'll likely need to start with a secured credit card. Keep in mind; these cards can either build or rebuild your credit.

A secured credit card is secured by the cash deposit you make when opening an account. This deposit is determined by your credit score. For example, if you deposit $200, you'll have a spending limit of $200.

The deposit reduces your risk of borrowing. And if you're unable to pay your bill, the insurer can take the money from your deposit. So, these cards are a good start for individuals with bad credit or without a credit history.

If you pay your bills on time, the issuer will give you back your deposit. And if you use the secured credit card responsibly, you'll eventually improve your credit enough to qualify for an unsecured card.

The minimum and maximum secured credit card deposits vary by card. But you should be ready to put down a payment of at least $200.

3. Pay Your Loans on Time

Loans such as student loans can affect your credit score. So, it's critical you pay any monthly installment on time. Payment history of a loan is one of the factors that lenders use to determine your creditworthiness. Late debt repayments can remain on your credit history for up to seven years.

Apart from student loans, banks and other lenders can allow you to borrow other small loans for just about anything: an appliance, a car, or even a vacation. Keep in mind that a lender can disapprove of your application, so you should be ready to explain your case.

And if you qualify for these loans, ensure you repay them by the due date. This will show lenders you have some positive experience with installment loans, which will help to build your credit.

4. Take Out a Personal Loan

A personal loan is a short-term debt you borrow to buy large purchases, alleviate financial burdens, or pay for an unexpected expense. And as SoFi review states, you can apply for this loan at flexible terms and favorable interest rates.

The benefit of a personal loan is that it can help you diversify your credit, which accounts for ten percent of the FICO credit score. And as a result, strengthen your credit.

You can also use a personal loan to consolidate other debts, especially if you're struggling with high-interest credit card debt, car loans, or a student loan. With a lower interest rate, a personal loan enables you to pay more towards the balance and will also give you more time to pay off your debt.

5. Pay off Your Balances

If you're tight on cash in a particular month, you might get tempted to carry forward a balance for a while. But what if you're tight on money the following month? And the next? What will happen then?

That's how borrowers get into trouble. You carry forward a balance from month to month until it snowballs into something entirely unmanageable.

If you want to build credit safely, you should avoid these situations. The best way to do this is to pay your installment in full every month and keep your balances as low as possible at all times.

Stay on Top of Your Credit

Even though building credit takes time, it isn't hard to achieve. It just requires you to pay your bills and any debts you have on time. Also, use your credit cards responsively to build good credit, and hopefully you won’t run into financial struggles.

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