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When you’re just starting out in life, it’s hard to establish your independence. To get a job, you need to have some experience. To set up a new home, you may need some furniture or funds to cover the start-up costs. The same can be said for your credit. How do you establish credit when you have no credit history? What steps can you take to demonstrate that you will be responsible and are worth the risk?
One way to do this is to open a secured credit card or secured loan. Using funds from another account as security to establish your credit limit, this option allows you to safely explore the world of credit with minimal risk. Consider it a credit card with “training wheels.” It may take some time, but with steady practice, you will establish a credit history building a firm financial foundation in the process.
Here are some smart tips for building credit:
Use your secured credit card to pay one recurring bill. That could be a Netflix, Spotify, or cell phone bill that has a consistent balance each month. To further automate the process, set up an automatic credit card payment to cover the bill ahead of the due date. The goal would be to pay the balance in full every month. This will not only help you avoid paying interest and late fees, but it will also demonstrate a good payment history.
Keep the balance low on your secured credit card or loan. Ideally, you should only use up to 30% of your credit limit. For example, with a credit limit of $500, your charges should not exceed $150. Maintaining your balance below the 30% credit utilization threshold across all of your credit lines will help you demonstrate the responsible use of credit.
Avoid applying for additional credit accounts, especially if you do not yet need them. Having access to more credit may tempt you to spend beyond what you can afford. Get in the habit of reserving your credit card for true emergencies. To avoid overspending, ask yourself these key questions: Do I need this? Can I afford it? How long will it take to pay it off? If it helps, think about your debt load in terms of the number of hours (or days) you will need to work in order to cover the expense.
Always be aware of your account balances, payment dates, and interest rates so that you never miss a payment. Monitoring your account via the mobile app allows you to make informed decisions about your money. To further automate the process, set up text alerts for balance updates, payment reminders, and notifications about a large deposit or withdrawal. The way you manage your accounts says a lot about your creditworthiness, a key consideration in building credit.
To continue your credit education journey, explore the rich content of our financial education tool Enrich.
If you would like to learn more about the products Allegacy offers to help you build your credit and what would be a good fit for you, visit this page with collected resources that help you prepare for the future.