Having a good credit score in the United States is like having the golden ticket to Willy Wonka’s chocolate factory. Except instead of being able to gorge on all the candy you want, you’re able to buy all the metaphorical candy your heart desires with money that you might not have yet. That’s because an excellent credit score puts you in the good graces of banks and other money-lending institutions that are willing to loan you funds on favorable terms because you’ve kept up with all your I-O-Us.
What do you do, though, if your credit history is very recent or pretty much non-existent? Maybe it’s because you’re new to the country or you’re just scared of those credit card rates. Whatever the case, there are ways to establish a positive credit score that go beyond just “make those monthly payments.” (Though, yes, that’s important.)
Here’s where to start:
There are three major credit bureaus that lenders tend to choose from when pulling up your credit score: Equifax, Experian and TransUnion. Remember, credit scores come into play when you need to buy a home, rent an apartment, or get a loan for your car (or, really, almost anything).
There are a number of factors used to calculate your score, but the most important ones are your payment history, amount of debt, and length of credit history, according to Marshay Clarke, a certified financial planner at Betterment. Keep in mind that paying your phone bill or other utilities won’t count, as lenders want to see that you’re responsible at paying off debt.
When it comes to your overall debt, also keep in mind your “utilization ratio,” which is the percentage of the available credit you’re using. Clarke says the rule of thumb is to keep your usage below 30% and to remember that the longer you’ve had a certain type of debt, the more weight it carries. “If you’ve had student loans for five years and made the payments on time, your credit worthiness is more predictable than someone who just got their first credit card six months ago,” Clarke says.
If you’re wary of taking on any additional debt, think about reworking how you pay for the thing you already need to pay every month, like your phone bill or that streaming service you have on automatic payments. “For example, if your cable bill is the same each month, authorize your credit card to pay that utility bill on a set date each month,” Damon Duncan, a board-certified specialist in consumer bankruptcy, says. You’ll also want to make sure that you’ve set up your bank to pay off your credit card in full every month, if you’re able. “This allows you to develop a positive history of payments while also being able to budget your expenses in a systematic way,” he says.
It might seem odd, but if you have a family member or a partner with some good money habits (as in, their credit score is ah-mazing), ask them whether you can become an authorized user on their card. If they’re making good payments and have a longer credit history than you, their positive activity will also reflect on your score.
Most landlords don’t report those timely rent payments to credit agencies, but you can use a few workarounds. If your landlord allows it, you can use a credit card to pay your rent and then pay your credit card in full through your checking account.
You can also utilize services like Pinch Rent, where you can send copies of your monthly payments for documentation. Or you can use RentTrack to pay your landlord online and then have your history of rent payments reported to all three credit bureaus. But, as Investor Mint points out, you’ll have to pay a small monthly fee if your landlord isn’t signed up for RentTrack.
Keep in mind that you don’t have to take on a big loan to boost your credit score. You can always start with a small credit card with a local grocery store, mall chain, or gas station. Starting with small credit limits at more local places will still help you to establish a good history of regular payments.
If you really don’t want to take out a credit card, consider getting a secured credit card through a bank. Essentially, you’re working with a credit limit that you’re backing financially by providing some cash collateral. This is a great option if you have an extra $300-$500 in savings that you can repurpose toward building up your credit score. A $500 deposit will earn you a $500 credit limit on a card that you can then make regular payments on to establish good credit history, as your payments will be reported to the credit bureaus.
You’re more likely to find a credit builder loan (also sometimes called “starter loans”) at a local credit union or a community bank. Motiv, for instance, offers a $300 credit-building loan and allows the loan to be shared among clients so you can help someone else who’s also trying to build their credit score. You make monthly installments on your plan and, in doing so, build your credit score. At the end of the term, the balance is paid back to you.