Most people often ask the question of, how do I build a credit profile from scratch?
Well, building your credit profile for the first time can feel a little like the chicken and the egg because to make a good credit score (the essential thing needed) you’re going to need to take out a loan or get a credit card.
But wait, hope you’re aware that you can’t qualify for a loan or get a credit card without having some credit history right? So what do you do?
Open a Bank Account
Let’s start with a bank account. May I remind that you don’t need a long credit history to open a checking account at your local bank; in fact, you may have one already. And even though a checking account won’t necessarily help you build credit history with the bureaus, however, having such an account may help you get your first credit card or loan from the same provider. Here is the point, if you already have a history of doing good business with the bank, they know you and value that business. And that existing relationship can carry some weight when it comes time to get your first line of credit.
Now, that is an excellent first step, but if that’s still not enough, here are a few other things to consider.
Get a Secured Credit Card
Some banks offer credit cards for people who want to establish, strengthen or even rebuild their credit profile. Such cards are often known as a secured credit card because you obtain the amount you borrow with a security deposit.
In other words, you provide collateral by depositing money in an account with the bank, something your lender gets to apply a portion of or all, should you default on the loan.
In this case, your credit line is equal to the amount you deposit. Thus, you won’t be able to touch that money or use it to pay off your balance, and you’ll still have to prove to the bank that you have sufficient income to pay the credit card.
But, the good news is that the bank will be more confident that you’ll pay them back even without great credit, thus allowing you to build or rebuild your credit profile.
Nevertheless, since you’ll be using your first card to build your credit profile, you might want to ensure that once it becomes active, your lender will report all those on-time payments to the bureaus before you apply.
Most banks and credit unions do this, but some retail store cards, for example, don’t. So make sure to check ahead of time, and if the card issuer doesn’t report your payment history, you might want to keep shopping for other cards.
Also, avoid applying for a bunch of different cards if you keep striking out. All those hard inquiries and declines aren’t going to help you build a score.
And lastly, keep in mind a secured card is different from a prepaid card. A prepaid card allows you to load the card with a cash amount ahead of time to spend later, and are great for people who need a Visa or MasterCard to make a purchase. But, they won’t help you build a credit profile.
Look for Co-signers
Another way to build a credit profile is to see if there’s someone who might be willing to co-sign a loan with you. This can be any creditworthy adult, including your parents or spouse.
When someone cosines a loan, you get the benefit of their excellent credit history, and this may help you get approved. With that, you can then build your credit profile with a good history of payment on the co-signed account.
Now, whoever co-signs the loan for you is taking on a substantial financial responsibility because they’ll be on the hook for the debt if you run into trouble.
In other words, it’s not something you should ask for lightly. When you do get credit extended to you, it’s essential to keep managing it carefully, even after you’ve built a history. You’re doing the right thing by getting off on the right foot, so, make sure you keep those good habits alive for the rest of your credit life history.
This will help you build an extended favourable credit profile, that will eventually result in a perfect credit score. If you have any further suggestions about how one can create a credit profile, please feel free to do so in the comment section below. Cheers!