Ten Ways to Build Credit on a Budget

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Credit Sesame recommends 10 ways to build credit on a budget.

If you want to be able to apply and get approved for future loans, credit cards, and other financial accounts, you’ll need to establish a credit history. Unless you build credit, you may get turned down when you want to borrow money. Also, the cost to finance could become more expensive.
You can learn ways to build credit, even if you don’t expect to use it right now or you’re on a tight budget.

Why it’s important to build credit

Establishing a good credit history may not be your top priority right now. But it should be if you ever plan to apply for credit or financial accounts in the future. It’s important to understand the different ways to build credit.

Consider that when you apply for new credit, lenders will do a credit check. “They may only accept candidates who meet particular credit criteria, such as a solid or exceptional credit score,” explains Lyle Solomon, a financial expert and principal attorney with Oak View Law Group in Rocklin, California. “Plus, if you don’t have good credit, you can be quoted a much higher interest rate or a mortgage loan, personal loan, credit card, or another account.”

Ponder this, too: Credit affects more than just your capacity to obtain new financing. Before being offered a job, some employers may review your credit for potential red flags – such as missed payments or credit accounts in collections. If your credit appears undesirable, you may not get the job.

Solomon lists several benefits that come with building good credit:

  • A greater likelihood of future credit approval.
  • Lower interest rates that can save you big money over the life of the loan or account.
  • Greater spending power. “A credit card with a bigger credit limit or a mortgage with a more significant loan amount may be available to you when you have good credit. And longer loan terms, such as a 30-year payback period versus a 20-year repayment period, may also be
  • available to you,” Solomon says.
  • Account perks. Many credit cards come with rewards, such as frequent flyer miles and cash back.

Understanding your credit reports and credit score

A credit report is a statement that has details about your credit activity and current credit information such as loan payment history and the status of your credit accounts. Each of us has three credit reports that are created and managed by the three big credit reporting companies: Equifax, TransUnion, and Experian. Each of these reports provides a quick summary of any open or closed credit accounts you have as well as details about missed payments, collections activities against you, or other red flags. You can access each of your three credit reports for free at AnnualCreditReport.com.

A credit score is a three-digit numerical estimate of your creditworthiness. The higher your credit score, the better your ability to qualify for better loans and credit products and at more favorable rates and terms,” adds Solomon. “Your credit score can range from as low as 300 to as high as 850. A credit score of 700 or higher is considered a good score.”

When you work to build credit, you can improve your credit reports as well as your credit score. There are many ways to build credit, even on a budget.

Ways to build credit

There are several strategies you can pursue to build and improve your credit score. Try these tips, suggested by the experts:

  1. Make timely payments.If possible, pay your bills and invoices and any current lines of credit on time before the due date. If all you can afford is to pay the minimum balance due, do so,” recommends Solomon.
  2. Don’t be afraid to use your credit card from time to time. “If you are on a tight budget and looking to boost your credit score, it’s smart to make at least one small routine purchase with a credit card each month and then immediately pay off the balance,” says Carter Seuthe, CEO of Credit Summit. “This will help you build a positive credit history without taking any more money out of your pocket.”
  3. Get added to someone else’s credit if you don’t qualify.You can request that someone else add you to their credit card as an authorized user if you can’t get approved for credit yourself. This way, you can improve your credit by being a customer – you don’t even have to make any purchases or use your friend’s account,” Solomon notes.”
  4. Enlist the help of a co-signer. Encountering difficulty acquiring credit? Consider asking a friend or relative to co-sign your credit card or loan application. “But use this choice with caution, and make sure you can pay back your debt. Failing to do so can result in the co-signer’s credit being ruined as well as your relationship,” cautions Solomon.
  5. Review your credit reports for errors and inaccuracies.Your credit score will take a hit for any account-related misinformation. Review your credit reports at least once a year, and dispute any mistakes with the credit bureaus,” says personal finance expert Maya Nijhawan, co-founder/COO of Finch.
  6. Get a secured credit card. A “secured” credit card required that money be deposited with the issuer for the account to be open. “The deposit serves as your credit limit, although the card should function similarly to any typical credit card,” says Solomon.
  7. Apply for a credit-builder loan or secured loan. With this arrangement, the lender creates a savings account or certificate of deposit with a specific loan amount, commonly between $300 and $1,000. You will fund payments toward the loan over six to 24 months. Over this time, the lender will report your payments to the three credit bureaus, helping you to build credit. Once you’ve made all your payments punctually by the conclusion of the loan’s term, the lender will provide the funds for you to borrow.
  8. Avoid using all your available credit limits.If your credit limit is $5,000 and you charge $4,800, you will have used a lot of your available credit. Overutilization causes creditors to be concerned because your debt-to-credit ratio is very high. Aim to keep your debt to 30% or less of your available credit,” advises Solomon.
  9. Avoid closing credit cards. You might have certain credit cards you no longer use. But closing an account may impact your debt-to-credit ratio, as you will be reducing your available credit whenever you do so, cautions Nijhawan.
  10. Open and keep a bank account.A bank account is a useful financial tool to have, creating a positive impact on your credit score. Just realize that it’s actually more important to build a reliable history of payment on your debts,” says Seuthe.

How many of these ways to build credit could you start today?

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Erik J. Martin
Erik J. Martin is a Chicago area-based freelance writer and public relations expert whose articles have been featured in AARP The Magazine, Reader’s Digest, The Costco Connection, The Chicago Tribune, Los Angeles Times and other publications. He often writes on topics related to real estate, business, technology, health care, insurance, and entertainment.

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