How to Build Your Credit

Signing on the lineBy Aurora M.

The most important challenge to any new business is funding. Often, the funding for a new startup will come from investors or loans from the bank. In order to get effective funding and hold a strong share in your own company, it’s important to build your credit. This will work out best if you start early.

One of the greatest parts of your life before you’re an adult is the lack of responsibility; you have no bills to pay and very little responsibility, meaning that you don’t have a lot of consequences. But then you grow up and suddenly there are a dozen new things you have to pay for every month and things get really stressful really quickly.

It’s during this pivotal transition that it’s easy to step into some bad habits. You feel like you can’t afford to do anything, but at the same time you don’t have any credit, meaning you can’t even borrow money to be able to afford the things you want and need.

Co-sign

One of the biggest struggles when you’re first trying to build your credit is that you often won’t qualify for a loan, or you won’t be able to rent an apartment because there’s no way for the landlord to see that you’ll pay your rent on time. However, renting or having a small loan is one of the easiest ways to build credit. If possible, see if someone you trust in good financial standing would mind cosigning a lease or loan with you. Their good credit will let the lender know that you’ll be able to pay them on time, but since your name will be attached to the loan, you’ll start earning good credit (as long as you pay your bills on time every month!).

Apply for a student credit card

Credit cards can be tricky. They’re help build your credit, but if you’re not careful, you can get yourself into a lot of trouble with debt. When you’re first trying to build your credit, look for a card that doesn’t have annual fees, has a low interest rate, and also has a low starting credit limit. A lot of student credit cards fit this description. Most of them will have a starting credit limit of $500 or $750. This will keep you from spending more than you’ll be able to pay back. Transitioning to paying with plastic instead of cash is really convenient since you don’t have to worry about cash, but it can also make you feel more cavalier about your spending. Because you don’t have to physically hand over the money you’re spending, a lot of people find themselves spending more than they should. Especially if this is your first credit card, be wary when spending, and try to treat your spending like you did back when you primarily paid with cash.

Woman with credit cardSomething important to keep in mind with credit cards is that they’re most effective at building your credit when they’re not maxed out. If you’ve reached your credit limit and then you take a long time to pay it back, you show that you’re comfortable having debt and you don’t pay your bills in a timely manner. The best strategy when paying with credit cards is to only spend money that you have in your checking account. And then immediately pay it off. As long as the balance on your credit card never exceeds the balance in your checking account, you should be safe.

Payment plans

Sometimes you find yourself in a situation where you need to build your credit back up, rather than try to establish credit for the first time. The same rules above apply to any credit situation, whether it’s your first time building credit, you’re trying to fix your credit score after making some poor choices, or you just want to improve your mediocre/good credit score. In a situation where you already have credit, but it’s suffering, it’s important to put yourself on a payment plan, so contact your creditors or talk to a financial advisor. Finances after a major life event can be tricky. Make sure that it’s doable, and don’t over-promise.

Although you can always just set up a payment plan independently to pay off your debts, it’s a good idea to include another party to hold you accountable, whether it’s a friend, family member, or the institution you owe money to. One of the advantages to communicating these plans with your creditor is that they will know your plan, and you can maintain a good relationship with them because they can see that you’re willing and trying to pay off your debts.