There’s a common belief that to build and maintain an excellent credit score, you must be at least somewhat well off. It is true that having greater earnings and savings allows you to open and maintain more credit accounts.
However, you don’t have to be swimming in cash, or spend lots of money, to keep your credit, and your finances more generally, in good order. Let’s take a look at how to build a credit score you can be proud of – without breaking the bank.
1. Become An Authorized User On Someone Else’s Credit Card
One of the simplest ways to build credit, is to have someone else add you to their credit card, allowing you to benefit from their responsible use of this card. Basically, you’ll want to find someone who always pays their credit card on time, and keeps the balance on their credit cards below 30% of the card’s limit. Ideally, this person has had their credit card open for at least 2 years.
You’ll ask this person to add you as an authorized user on their credit card. To do this, they must provide your Social Security Number, date of birth, and some other information, to the credit card issuer. The card issuer will then mail over a copy of the credit card, for your use.
But here’s the catch: The cardholder doesn’t have to provide you with a copy of the card, in order for you to benefit. By simply adding you to the account, you’ll benefit from their positive credit behavior. This reduces their risk, while allowing them to offer you help at the same time.
Have a friend or family member add you as an authorized user. Don’t waste time and money on buying tradelines.
2. Open A Secured Credit Card (If You Don’t Have Any Credit – Or Bad Credit)
If you are new to credit, and have limited funds, one of the best ways to build credit is to open a secured credit card (if you are a student, skip this step, and go to #3). With a secured card, you put up a deposit (sometimes as low as $49, with the Capital One Secured Mastercard), to get started, with a $200 line of credit. That will be your spending limit.
Each month, you should make no more than one small purchase on the card, and pay off the balance, allowing you to avoid interest. You can spend as little as $10 or $15 each month.
The credit card issuer will report your on time payments, and low amounts of debt, to credit bureaus, allowing you to build a positive credit score. You don’t need to engage in any new or additional spending – simply make a few purchases you might otherwise, through your card.
Which secured credit cards make the most sense for you? Our favorite choices are from Discover and Capital One.
With Discover, after about 8 months, assuming you’ve always paid on time, you’ll be refunded your security deposit, and upgraded to an unsecured credit card. This card will offer a higher limit, and allow you to continue building excellent credit.
Capital One also allows you to upgrade to an unsecured card, although the process is not as automatic. One major advantage of Capital One, however, is that it allows you to put down a smaller deposit to open a secured card – sometimes as little as $29.
Neither of these cards carries any annual fees. Assuming you pay off whatever was spent on the card,
3. Open a Student Credit Card
If you are a college or graduate student, you don’t have to offer a deposit to open a secured credit card. Instead, you are eligible for a student credit card. This card will carry a low spending limit (usually a few hundred dollars to start), and no deposit, allowing you to build credit.
You will also earn rewards in various categories, including groceries, restaurants, gas stations, as well as cashback, and money to spend on Amazon. All you need is to make a few small purchases (let’s say for lunch or snacks), and pay off the card each month (allowing you to avoid interest and save money).
There are several great options for student credit cards, with our favorites being offered by Discover. Just as with secured credit cards, you’ll want to always pay on time, and pay off your balances each month.
Once you finish school (or even before), you’ll be able to apply for a non-student credit card, which will likely offer a higher spending limit, and more rewards points, which allows you to continue building credit, while enjoying more benefits. We suggest holding off on applying for another credit card, until after you’ve finished school, or are more certain as to your income situation.
4. Sign Up For A Credit Builder Account (Optional)
Only follow this tip if you are on a budget, but have a little extra cash to spare (let’s say about $25 per month): You might want to consider opening a credit builder account. This allows you to build credit while saving money.
What is unique about credit builder loans? 10% of your credit score is determined by your mix of credit, that is, having different types of credit accounts. This means, ideally, to enjoy the best score possible, you’ll have a couple of credit cards, as well as some sort of installment loan (like a car loan, mortgage, personal loan or student loan). Of course, maybe you are hoping to qualify for a mortgage or auto loan in the future. In this case, showing some type of installment credit, before you apply, will be a great help. That’s where credit builder loans help.
With this loan, a lender is basically making a loan to you, which is set aside and held in a certificate of deposit (a type of savings account). You can’t access this money until you’ve repaid the entire amount loaned to you – which makes the loan almost risk-free for the lender.
You make payments each month to the lender.The lender reports your payment history to credit bureaus, which allows you to build credit. At the end of the loan term (usually anywhere from 12 to 24 months), you will recieve the amount which was loaned to you.
Credit builder accounts are often made available through your local credit union. However, one of our favorite resources for credit builder loans is through Self Inc , an online platform, available in all 50 states.
Under Self’s cheapest plan, you’ll make a payment of as little as $25 to a lender, each month. Over 24 months, you’ll pay $600, and get back $520 (meaning, this account cost you $80 over 2 years). That is quite a low price to pay for building strong credit in a simple way.
5. No Matter What, Pay On Time
The key to excellent credit is simple: Always pay on time. Your payment history is the largest factor in deciding your FICO score, counting for 35% of your overall number. Having a single 30 day late payment, on an otherwise perfect credit report, can reduce your score by 100 points or more. For this reason, you’ll want to make sure that you always pay on time.
There are several ways to ensure this. You can set up automatic pay, known as “autopay”, within your credit card account, allowing you to pay part or all of your balance (you select the amount), automatically, without logging in to your accounts. On the other hand, if you want to login and pay each month, you might want to place a note on your calendar for each month, reminding you to take care of that.
As always, there’s an app to help you with this. Mint is free, and allows you to see all of your accounts in one place, and provide reminders when payments are due. Earnup automates all of your bill payments, for a small monthly fee.
The Final Word
It really doesn’t take much money to build a solid credit score. The sooner you start, you’ll be able to enjoy the many benefits of excellent credit. Why not start today?
