Establishing Credit: It’s Possible with These 5 Ways to Establish Credit
So you want to establish credit, but you have no idea where to start. That’s a frustrating yet understandable dilemma: establishing good credit feels like a catch-22.
You need credit to establish credit. But you can’t get the credit because you haven’t established that credit yet. What’s a person to do?
Fortunately, there are ways to establish credit this year—even if you have never had a credit card or a loan before.
Welcome to your guide to the 5 best ways to establish credit. Here we will teach you:
- The basics of establishing credit and what that even means
- How long establishing good credit takes
- Top ways to establish credit
- Reestablish credit and what it is compared to building credit
At the end of this guide, you should have a better idea of the best way to establish credit for you.
Understanding Credit 101
Before we show you ways to establish credit, let’s quickly review what credit really is.
Your credit score is a number that reflects how trustworthy banks see you for a loan or line of credit. This can be influenced by the following:
- When you miss payments, skip payments, open countless credit cards, take out many loans, max out your credit cards, or file for bankruptcy, your credit score usually goes down.
- When you pay bills on time, pay regularly, have a moderate amount of cards or loans, or keep your credit line open, your credit score usually goes up.
The higher your credit score, the more likely a lender or bank will be willing to give you the loan or credit card you want at the lowest interest rate possible.
That is why it is so important to start establishing good credit as soon as you can.
How Long Does Establishing Credit Take?
You are about to read the best ways to establish credit this year. You will need to choose which will be the best way to establish credit for you. Then you will need to make a plan.
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But a plan won’t be very helpful unless you know how long these methods will take in establishing credit.
Keep in mind it will take more than a few weeks to start establishing good credit.
- On average it will take a full year or more to land a fair or good credit score.
- Many times, it will take five or six years to get an excellent credit score.
You may want that great score in a few weeks. But be patient and realistic as you start trying these ways to establish credit.
Ways to Establish Credit: 5 Things to Do
Now that you understand the basics of credit and why you need it, let’s focus on how to establish credit for the first time.
Here are five of the best ways to establish credit this year.
- Use secured credit cards to establish credit
- Use credit-builder loans for establishing credit
- Become an authorized user on someone else’s credit card
- Ask a cosigner to help you establish credit
- Your student loan can be used for establishing credit
We will dive deeper into these ways to establish credit in the next sections. By researching these various methods, you will begin to be able to see which is the best way to establish credit for you.
1. Use Secured Credit Cards to Establish Credit
One of the easiest methods of establishing credit is to use secured credit cards to establish credit.
If you use secured credit cards to establish credit, it works like this:
- You give the bank or lender a collateral deposit (let’s say $500)
- Your credit limit is now $500
- You then use secured credit cards to establish credit in the same way you would use any other credit card
- Each month, you pay at least the minimum payment on your bill
- When you use secured credit cards to establish credit, the bank or lender then reports your activity to a credit agency so you can start establishing good credit
When you use secured credit cards to establish credit, the bank or lender does not have to worry about losing money on you because you gave them that initial collateral deposit. If you do not pay on your bill, they do not lose money.
Eventually, as you use secured credit cards to establish credit, you will have enough credit to open a regular unsecured credit card with a great interest rate and even perks.
2. Use Credit-Builder Loans for Establishing Credit
Next up on our list of ways to establish credit is using credit-builder loans for establishing credit. In many ways, a credit builder loan follows the same steps for when you use secured credit cards to establish credit.
- You give the bank/lender a collateral deposit
- You get loan terms (when you pay, how much you pay, etc.)
- Once you have successfully followed the terms and paid back the credit-builder loan, you have started establishing good credit
Like when you use secured credit cards to establish credit, the bank does not lose out if you fail to pay back your loan. After all, you set up the deposit.
This also means a credit-builder loan does not really put cash in your pocket. It is merely a tool for establishing credit. Once in a while, you can find a credit-builder loan that will give you money, but this is rare.
3. Become an Authorized User on Someone Else’s Credit Card
On our list of best ways to establish credit, some ways to establish credit will work better (and faster) than others. For example, if you use secured credit cards to establish credit, you will probably establish credit more quickly than this next method: authorized users.
Simply because establishing credit by being an authorized user on somebody else’s credit card may not establish credit as quickly, it is still a valid option. It works like this:
- Somebody you know and trust has a credit card (like a parent or spouse)
- They sign you up as an authorized user on their account
- This means you get your own credit card with your name and number, but it ties back to their account
As they build credit, you will start establishing credit. As you could imagine, this comes with potential downsides:
- Con for them: If you rack up payments on your card and refuse to pay them, they are left with the bill.
- Con for you: If their credit goes down, so will yours; so if your goal is establishing good credit, make sure you trust their credit behavior.
4. Ask a Cosigner to Help You Establish Credit
Next up on our list of ways to establish credit is using a cosigner. The process of establishing credit through a cosigner works like this:
- You find a loan you need or want, but you do not have credit for a lender to give it to you
- You find somebody, your new cosigner, who will sign the loan as well
- The lender will then give you the loan based on their creditworthiness instead of yours
- You can start establishing credit through your new loan
It is not always a simple task to find yourself a cosigner. If you fail to pay back the loan, this cosigner will be entirely responsible for the remainder of your payment.
Often, this cosigner will be a parent or guardian.
5. Your Student Loan Can Be Used for Establishing Credit
Young people are most often the ones needing to establish credit for the first time, so this final method on our list of ways to establish credit is an ideal solution.
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Student loans will begin establishing credit. But if they are going to do so, you need to follow a few steps as outlined by Student Loan Hero:
- Always make your payments, 100% of the time
- May payments affordable by asking for income-based repayment or a lower rate
- Contact your lender before skipping a payment
Know that private student loans will often require a credit check. In this case you may need a cosigner (see above) in order to start using them as one of the best ways to establish credit.
Federal loans, however, do not require a credit check. So you can receive a federal student loan before establishing credit.
Can You Reestablish Credit the Same Way?
This article on ways to establish credit has been focusing on those who have yet to have a credit score of there own.
But there is another group of people who need to do work with their credit too: those with bad credit scores. If this is you, you may be wondering if the tools that establish credit can be the same tools to reestablish credit.
The short answer is yes. You can absolutely use secured credit cards to establish credit or reestablish credit.
The better answer is to figure out exactly what gave you a bad credit score and fix those habits first:
- Start paying your bills on time
- Set a monthly alarm to remind you of due payments
- Do not max out your credit cards
- Create a budget so you can manage your payments with more confidence
- Do not close out your old credit cards, but stop using them
Combine these lifestyle changes along with some of the ways to establish credit that we have mentioned, and you should be able to reestablish credit in no time.
Conclusion: Best Way to Establish Credit for You
You now have an understanding of the five of the best ways to establish credit. Now the goal is to figure out which of these ways to establish credit will be ideal for you.
For example, if you do not go to college, you may want to use secured credit cards to establish credit, or a credit builder loan. If you do go to college, make sure to make responsible payments on your student loan to help establish your credit.
If you have a family member who trusts you enough to cosign or become an authorized user, you could take advantage of their help as the best way to establish credit for you
No matter which ways to establish credit are right for you, remember it will take a little patience and structure. But within a year or two you will be enjoying the benefits of establishing good credit with a score you can be proud of.
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