Staying thin is a priority for many of us. However, thinness shouldn’t be your goal when it comes to your personal credit file. A thin credit file means you don’t have enough credit transactions to generate a credit score.
Without a credit score, you’re likely to struggle to get approved for loans and credit cards. You also may have to pay more for home and auto insurance coverage. Clearly, fattening up your credit file is essential, but how best to go about it? Here are seven tips to consider as you seek to build up credit for your financial future.
Before starting your credit journey, take stock of where you’re at and where you’d like to go. A budget will help you stay within your means by charting how much comes in and goes out every month.
Having a dedicated fund for purchases — outside of bills and other mandatory payments — will help keep you on track financially. A budget also makes it easier to lump bill payments together into a sum you know you can afford. Armed with that knowledge, you can set up an account and debit card to use for responsible discretionary spending.
One of the best ways to build credit is to use a credit card for everyday purchases and pay it off fully and on time. If you’ve budgeted correctly, your recurring bills are perfectly set up to be paid in this manner. You’ll put a set amount on your card each month, effectively prioritize important bills, and build credit at the same time.
Acquiring a credit card can be tricky with a thin credit file, but it’s not impossible. There are credit builder cards designed for those with low to no credit. Investigate which one might be right for you, and apply. Once you start using it consistently, your credit file will start to grow.
Setting up a bills-focused budget is a huge help when it comes to paying bills on time. Prompt payment, in turn, will help fatten up your credit file, as payment history has a significant impact on your credit score. Establishing good bill-paying habits will set you up for financial success later. If you can take care of your obligations a few days ahead of schedule every month, so much better.
One great way to make sure you always pay your bills on time and in full is to set up automatic payments. Most utilities and other companies will help you set up autopay via their website. Have your bank routing number and specific account number handy. To supercharge your credit-building efforts, consider paying your bills with a credit card and then paying off that balance in full every month. Additionally, several reminder apps out there can help keep the top of your due dates of mind if an automatic payment is not an option.
In addition to starting new accounts, you’ll want to maintain old ones. Like how you’ll want to pay any bills on time, you also want to continue payments on existing loans. Consistency of payment has a significant impact on your credit file, as does having accounts in good standing.
Loans and other accounts remain on your credit report for 10 years after you’ve made the final payment. It’s hard to overstate the importance of a loan that was paid off on time. Even if you don’t have a credit score now, your long-standing accounts will help you over the long haul. The closer you get to a zero balance on your debt, the better you look in the eyes of lenders. Any time you’re presented with an opportunity to demonstrate responsible financial decision-making, take it.
If you’re a renter, one opportunity that may be available to you is reporting your rent payments to credit bureaus. This simple practice can serve as a great way to fatten your credit file, assuming you’re eligible. You have to pay rent anyway; you might as well benefit from that monthly expenditure. Again, creditworthiness is all about demonstrating consistent payments over time.
Talk with your property manager or landlord to see whether your rent is already being reported. If not, ask that they start doing so. It seems like a small thing, but a consistent track record here can have a considerable impact. As you report these payments, your account history will grow, and this action should reflect positively on your file. Wouldn’t it be nice to get credit for the financial work you’re already doing?
Taken literally, the work you’re already doing can have a positive impact on your credit file. This is a big difference between credit files and credit scores. Your job won’t affect your score, but it does appear in your credit file.
A higher credit score, or having a score at all, isn’t the only reason to increase the size of your credit file. Consistent employment can signal to potential creditors a sense of responsibility. Many, like mortgage lenders, need to see a history of stable employment before you’re approved for a loan. So it might be best to defer any major changes to your employment situation until you’ve reached your credit file goals.
Sometimes, we all need a little help to reach our goals, especially in personal finance. If your lack of credit has limited your credit-building options, it’s time to find a trusted friend or family member. Ask them if they would add you to their credit card account as an authorized user.
By becoming an authorized user, you reap the benefits of owning a credit card without being responsible for its upkeep. Ideally, you want to set this up on a card that someone has owned and used consistently for a long time. You’ll need to have an honest conversation with the card owner about their payment history. Attaching your name and credit to an account that’s poorly managed will hurt more than it will help.
Ultimately, how you grow your credit file is up to you. There are many different ways to go about it, and what works best will vary from person to person. Take stock of where you’re at financially and figure out where you’d like to be. Doing so will help you identify which path is right for your credit journey. Over time, you’ll find the habits you develop now will help you maintain a good credit score in the future.