proposition to take on the task of effectively establishing a credit history that can be considered advantageous. One of the paradoxes that must be overcome when attempting to build credit is the fact that many creditors will not be willing to extend credit to someone who does not have an existing credit history. Many credit experts will tell you that having a derogatory mark on your credit can actually be better than not having any credit at all.
In order to have a FICA score, you must have at least one account on your credit report that has been open for a minimum of six months in addition to having a minimum of one creditor reporting to a major credit reporting agency in the last six months.
Secured Credit Cards
One of the most common methods for building credit is the use of a secured credit card. Secured credit cards are probably the easiest way to open a credit account without an existing credit history. Generally, secured credit cards can be obtained by nearly anyone, primarily due to the fact that the credit that is being issued is guaranteed by a deposit that is made by the person who the credit will be extended to. In most instances, creditors will be offered credit equal to the amount of the security deposit, while other creditors will offer credit for 150 percent of the amount of the deposit. On rare occasions, there are certain creditors that will only issue credit for a fraction of the deposit, ensuring their profit margin.
The secured card is not to be used as a permanent credit account. One reason why you will not want to use this card as a permanent account is that the interest rate will be exorbitant when compared to an unsecured card. Additionally, you will want to get your deposit back at some point, and the only way to do that is to close the account. Some secured card issuers will convert the account to an unsecured account after you have paid on time for a certain number of months.
A Credit Builder Loan
A credit builder loan is exactly what its name implies; its sole purpose is to help build credit. How this works is that the creditor will actually hold the loaned funds in an account, until part or all of the loan has been repaid, and then the funds will be released, which is why this modality is also referred to as a reverse loan. This method of building credit can also be viewed as a forced savings program, because at the end of the process, there will be lump-sum that can be placed into a savings or surplus account. The most important element of this process is that the lender will be reporting the payments that are made to the major credit bureaus — helping to build your credit.
Use a Cosigner
Another way to secure your first credit account is by using a co-signer to guarantee payment. Using a co-signer will open up the possibility of getting a more conventional loan or an unsecured credit card. It is important that it be clearly understood that the co-signer will be responsible for ensuring that the loan or credit card payments are made in full if you don't make the payments, or their credit can be adversely affected.
Become an Authorized User on Someone Else's Account
If you have a family member or significant other who is willing to add you to their existing credit account, this is another way that you can build credit. What makes this different than the previous options is the fact that while you may enjoy the benefits of having access to this credit, you will not be legally obligated to pay the charges — although you are still morally and ethically on the hook."
The key to building good credit is making the payments on time, and when possible, pay more than the minimum. Make it a point not to max out any credit card accounts. Many people make it a point to pay their card debt in full each month. Avoid the temptation to open multiple accounts, which is one of the fastest routes to unmanageable debt, and you should be well on your way to building your credit.