Poor financial literacy can lead to crucial pitfalls, such as accumulating unsustainable debt. Unfortunately, this issue is something that Americans have yet to overcome. Consumer Financial Protection Bureau (CFPB) research shows roughly 26 million Americans lack a credit record as of 2020.
To address this issue, people must learn about wise spending habits early. This guide outlines valuable tips to help young professionals build good credit scores.
Apply for a Credit-Builder Loan
A credit-builder loan is a debt you can pay in installments and get money for after the payment. This loan can help boost your credit score if you make timely payments.
Some lenders offer this loan to help borrowers build a good credit score over time. With these loans, lenders set aside the loan amount, and borrowers get the money after completing all payments.
Some lenders may require you to pay interest on credit-builder loans. However, others return all interest, while some return a portion after you pay off the loan.
Credit-builder loans help borrowers establish credit and show other creditors they are responsible borrowers.
Try Rent Reporting Services
Most borrowers do not know that they can build credit by paying rent. Only a few landlords report rent payments to the credit bureaus.
However, you can still enjoy this advantage even if your landlord does not go through this process. Use rent reporting services instead of waiting for your landlord to report your payments.
You can send your payment to the rent reporting service, and they will report your payments to credit bureaus. Afterward, they will forward your rent to your landlord. Although you have to pay to use this service, it can effectively build your credit.
Remember that the most effective way to build a strong credit record is to lower unsecured debt. If you have debts, pay them on time and consistently to maintain a good payment history.
It is wise to use one credit card and pay off debts on time every month. If you apply for a personal loan because of a financial emergency, pay it on time. Forming this habit at a young age can help you build a strong credit record.
Be an Authorized User on Your Parent’s Credit Card
If both or only one of your parents has a good credit history, you could ask them to make you an authorized user of their account. This way, you can keep a good credit record even without your own credit card. However, this strategy will only work if your parents keep their balance low and pay on time.
Remember that not all credit card companies report authorized-user activity to the credit bureaus. So before your parents add you to their account, make sure your issuer reports your activities as an authorized user.
Pay Bills on Time
Always pay your debts and bills promptly to establish a strong credit record. Remember that late payments can be your worst enemy when building credit. So pay all your bills before they are due.
You might think that one missed or late payment does not matter in the long run. However, this mistake can cause your score to drop, which will stay on your record for years.
That is why it is crucial to slowly ease into using credit. This way, you can be smart about your financial decisions and not take on more than you can pay.