Money

7 Ways to Establish and Build Your Credit

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A good credit rating is a key that unlocks many doors. From renting an apartment to obtaining a car loan and buying a home, you'll need a solid history of good credit to make it all happen. Wondering how to establish credit? Building a good credit history takes some time and effort, but it'll be worth it when you need to borrow money or handle other financial tasks.

Here's how credit works: once you begin establishing credit, the three consumer agencies that record credit — Experian, Equifax, and TransUnion — keep a report on you. This report includes information on your ability to pay your bills on time every month. When you apply for a loan or mortgage, the lending agency will review that credit report, so they're sure you're capable of making good on the loan. If you're wondering how to build credit when you have none to begin with, here are a few tips to help you get started.

1. Understand how you can check your credit

When you start building credit, It's good to know that you can periodically check your credit score to determine if it's favorable. You're entitled to one free check of your report at each of the three credit agencies per year. To review your record, go to www.annualcreditreport.com, and fill out a short form. You'll receive a report that shows you what your creditors are reporting to the agencies. 

One strategy is to check one of the three reports every four months so that over a year, you'll get a full sense of what's been reported and what loan officers will be looking at when you go to borrow money

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2. Open bank accounts

Bank accounts aren't directly reported to the credit agencies. But they are, for many people, the answer to the question of how to start building credit. A checking account allows you to pay bills easily and learn how to manage money, while having a savings account is an essential factor in saving money for the future. Having accounts at a bank may also make it easier for you to apply for a loan or credit card through the bank since they have a history of your financial responsibility. 

3. Try a store or gas card

So, how to establish credit? Try applying for a smaller credit card, such as those offered by stores or gas stations, if you're just starting out. They'll be easier to obtain than one of the major credit cards and they're one of the easiest ways to build credit. If you're given a card, it'll probably have a relatively low limit, but it's essential to start using the card and pay it off regularly and on time.

4. Open a secured credit card account

Another way to start building credit is through a secured credit card. With this type of card, you deposit a certain amount of money (often a minimum of $200) into an account with a credit card company. This allows you to access a card you can use up to the limit of the deposited amount. Secured credit cards are designed purely for new users of credit. Once your ability to pay your bills is established, you'll probably want to close this account, get your deposit back, and open a regular credit card elsewhere. 

5. Become an authorized user

If you have difficulty even getting a smaller credit card, the best way to establish credit may be through becoming an authorized user on someone else's card. Perhaps your parents or an older sibling would be willing to allow you to become a user of one of their cards. You'll receive your card, and then you can make purchases with it. Keep in mind that your ability to pay on time will be reflected in both your credit rating and the other person's. 

6. Keep credit utilization under 30 percent

Let's say that you've considered how to start building credit for the first time and now have one or two credit cards as well as bank accounts. The easiest way to build credit now is to pay those cards off on time every month. If you can pay more than the minimum, do so. 

In addition to that, however, you want to watch your credit utilization. Credit utilization is a percentage obtained by taking the amount you owe on those cards and dividing it by your credit limit. So, for example, if your cards have a total credit limit of $2,000, and you have used them to buy $500 worth of goods, your credit utilization is 25 percent. The best way to start building credit is to try to keep that number below roughly 30 percent.

7. Life insurance can indirectly help

When learning how to build credit history, especially if you have a young family, you may wonder if a term life insurance policy can help. The answer is: not directly. But that doesn't mean you shouldn't consider purchasing a policy. If your beneficiary is a spouse or partner, they may struggle to maintain their credit rating if you were to pass away. 

A life insurance payout can mean the difference between a poor credit rating if a spouse can't pay the bills and one that'll allow them to maintain financial stability. How much life insurance do you need? Ethos life can help you answer that question, and you can apply for life insurance online with no hassles or medical exams in most cases.

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