Building and maintaining a credit history is essential to reaching financial prosperity in today’s day and age. While there are dangers of overusing credit cards or personal loans, responsibly using financial products is the best way to develop lender trust as a borrower.
If you’re like many of the thousands of people starting to think about their finances in the long term, now is an excellent time to start thinking about ways to build your credit history.
- Use a credit card
A credit card is the most accessible way to build your credit history. You can do this by purchasing with your credit card and then paying off its monthly balance.
Credit cards can either be secured or unsecured. In the case of secured credit cards, you and your lender agree on what your total credit limit will be with an initial deposit. This deposit will serve as collateral if you stop making payments for debt balances due.
- Get a personal loan
Personal loans are also accessible and fantastic options for building credit. They can help you establish a good credit history in several ways.
Lenders will believe you are a responsible borrower if you make your scheduled payment on time and in full. They report this activity to credit bureaus, and your credit will steadily begin to grow. You can also use a personal loan for debt consolidation, where you bundle all your debts into one convenient payment.
Personal loans come in secured and unsecured varieties, too. If you get a secured personal loan, you will be required to put up collateral, like a car or home, against the money borrowed. If you lapse on these payments, you risk losing this collateral.
- Keep your credit utilization ratio low
Another way to build your credit history is to make sure you keep your credit utilization ratio to under 30%. This shows that you can manage credit responsibly by not using too much of it.
To calculate your credit utilization ratio, divided the amount of credit you’re currently using by your total credit limit. The more you borrow, the higher your credit utilization ratio and the greater impact it can have on your credit score.
- Review your credit report regularly
Finally, regularly reviewing your credit report can be a surprisingly effective way to build your credit history. Doing so will help you catch and correct any errors or potential problems early on.
While it’s unpleasant to think about, people commit identity theft and apply for financial products using your personal information. Unfortunately, the only way to ensure this doesn’t negatively impact your credit history is to check for suspicious activity on your credit report.
