Building Credit

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Retail Credit Company Home Office, Atlanta Georgia

Are You Ready to Build Your Credit and Level Up Your Lifestyle?

Building your credit refers to instances in which you add positive elements to your credit report that improve your overall score. There are dozens of ways to build credit, whether you are an individual consumer or a business. Building your credit can help to improve your chances of being approved for loans and credit accounts, can lower your interest rates, and can bring down your monthly insurance premiums.

Whether you are an individual consumer or a business, you’ll need to have good credit in order to better your financial standing. For instance, you negotiate better terms with suppliers if your business can show a positive repayment history from work with previous suppliers. In order to show a good credit history, you will first need to build your credit from the ground up, which can be tricky.

How do I build my consumer credit?

If you have no credit or are recovering from bad credit, it can be difficult to get approved for loans and credit cards, but you’ll need those to build your credit in the first place. Luckily, with a little help from friends, family, and reputable financial institutes, you can begin building your credit easily.

Some of the options you have for building consumer credit include co-signed loans and credit cards. You’ll need a friend or family member with good credit who is willing to co-sign for you. Remember, if you default on your payments, the burden falls onto your co signer. And their credit score will drop as well. A family member may also be able to add you as an authorized user to their existing credit account. This puts the full burden of repaying debts on the card holder, but you will be able to make charges and build credit. This is a great option for building credit if you are only using the credit card on behalf of the holder for purchases that they would have been making anyway.

There are specific credit cards for building bad or no credit as well as loans that you can apply for on your own in the event that you are unable to find a co-signer or become an authorized user for an existing account. Two of these are the secured credit card and the well named credit builder loan. With a secured credit card, you are required to make a deposit up front to begin using the card, which is usually your credit limit. You can use this card like any other credit card to make purchases which you’ll pay off later. In the event that you are unable to make a payment, your initial deposit serves as collateral. When you close the account, your initial investment is returned to you. These secured credit cards are a great way to build credit until you are able to apply for a regular credit card. Credit building loans work in much the same way.

If you enter into a credit builder loan, the loan amount that you apply for is stored in an account held by the lender. You make payments on this money for a specified period of time. When all of your payments have been made, the amount of the loan is released to you, with the added benefit of having improved your credit. This type of forced savings account is also great for consumers who are trying to save money but are unable to properly budget their funds.

If you rent, you can also use rent reporting services that take a bill you already pay every month and simply add it to your credit report. While not every credit union will take these payments into account, it can often be enough to apply for a loan or credit card to build additional credit

No matter what you use to build your credit from the ground up, you should be aware that it is all for nothing if you don’t maintain good credit habits. You should always make your payments on time and keep track of your credit score to look for inconsistencies and inaccuracies. You’ll want to properly manage your credit by keeping accounts open as long as possible, even when not in use, and making sure that you do not have a large number of accounts open at any one time.

When building your credit, there are as many “Dos” as there are “Don’ts”. For instance, if you are using a credit card to build your credit, you DO want to make sure that your payments are always made on time, but you DON’T want to allow your total balance to reach more than 50% of your total credit limit. While you SHOULD have open accounts to build credit, you should NOT have a dozen accounts that you have opened around the same time. Having a large number of open accounts or using the majority of your available card balance are both indicators to lenders that you may be unable to repay your debts.

Keep in mind that the longer ago a negative item appeared on your credit score, the less likely it is to affect you now. If you miss a payment on one of your cards, pick up where you left off when you are able and continue making payments. You shouldn’t give up on an account and allow your credit card bills to default from lack of payment.

How Do I Build Business Credit?

As a small business or a new startup, establishing credit is an important first step. Establishing business credit will allow you to maintain a separate credit history from your personal credit history, experience the exclusive benefits of having good business credit, and demonstrate a separation between the business itself and the owners.

Having separate business and consumer credit histories is important if a negative event affects one or the other. If you are unable to pay a business loan or you lose your business entirely, it will not ruin your personal credit score. Likewise, if you have student loans that you are still
working on paying off, or that you are falling behind on, they will not affect your ability to open further lines of credit for your business. This clear separation can save your credit in the event of a financial tragedy, or the credit of your business in the event that you fall under personal financial hardship.

One of the first steps to growing your business credit is to incorporate your business. By legally separating the business and the owners, you also separate the credit histories of both. Incorporating or becoming an LLC legal separates the entities in question, allowing the business to begin growing its own credit history. You should then apply for a federal tax number of EIN. Just as you have a credit history tied to your social security number, so too will your business.

Not to mention, this is required for filing federal taxes and opening a business bank account. Even if you aren’t a large corporation, larger businesses may require your EIN in order to pay for services, due to their own IRS requirements.

Once you have your EIN number, you can open a business bank account and credit cards. Once you open a business banking account under the name of your business, you should be using this to make all of your business transactions. If you are using your business credit cards for most of your transactions, you can now use your business checking account to pay off those bills. Your business credit file (monitored by Experian, Equifax, and TransUnion) will improve as you make on time payments from your business banking account. You should always have at least one business credit card that is not tied to any of the company owners.

Part of establishing your business is also part of establishing your business credit: you will need a separate phone number. It doesn’t matter if this number is a landline, a cell phone, or if you are using VoIP, so long as this number is tied directly to your business and listed in directories.

Another method for establishing great credit for your business is opening a line of credit with your suppliers. Try to work out a credit system for your company when purchasing from at least five of your vendors. You can then ask these vendors to report your payment history to credit reporting agencies. Just as you would with your business credit cards, you’ll want to make sure that you are paying off these bills on time. Just like personal credit, making late payments or not paying at all can negatively affect your business credit score. Not to mention, you could incur negative impact from your suppliers if you are not paying them in a timely fashion.

But for all the work, there are a lot of benefits to improving your business credit. For instance, you can position your company to negotiate better payment terms with new suppliers in the future. If you open additional business credit cards, you can expect better interest rates and terms; the same is true if you are working with banks and lenders. Just like you would with your personal credit, you’ll need to monitor your business credit regularly and report any inaccuracies or problems to credit institutions.

Frequently Asked Questions

Q: Why should I worry about building my credit?

A: If you ever want to get a new car or a home in the future, you’ll need to show a good credit history. Your credit history will also be used when you apply for such things as car and health insurance and certain phone payment plans and rentals. Your credit history can also be applied more seriously when it comes to employment and rental applications.

Q: How long does it take to build credit?

A: Generally, you can build adequate credit in about two years. However, to get excellent credit (a score of 750 or higher), it can take up to 7 years of good credit habits. The age of your accounts is just one factor that goes into your full credit report.

Q: How can I build my credit faster?

A: To speed up the credit building process, start with a single account. Every six months, add a new credit card or loan account. Major credit cards, store cards, and auto and home loans are all great ways to build credit. You can also use credit builder loans designed specifically to help you build credit, and credit cards with no annual fees that you can open and not use to avoid racking up more bills.

Q: Why does more credit help my credit score?

A: Someone who has multiple credit accounts and pays them all on time is generally a better credit risk than someone who has one open account that they are paying on time. This shows that you are capable of managing multiple accounts at once and that you are able to budget to pay your bills on time. If you have more than one credit card, your total credit utilization also goes into account for your credit score. Basically, if you have two cards with a combined limit of $1000 and you are only using $500 at a time between the two, you have a 50% utilization rate, which credit companies look at favorably.

Q: Can I only build my credit if I’m in debt?

A: Absolutely not! You can build your credit, even if your credit is already pretty good. You can keep paying off the full balance of your credit cards and still gain credit; you don’t need to carry a balance to build credit.

Q: Can I use my rent payments to build credit?

A: While this isn’t always true, it can apply in some cases. You can have your rent payments reported to certain rent tracking platforms that will report them to credit bureaus. If your landlord or rental agency is not already using one of these rent trackers, you will need to pay a monthly fee to do so, and your landlord will need to validate your monthly payments in order for it to count.

Q: I have my first credit card; how can I use it to build credit?

A: Just use the card every month and pay it off on time! Remember to avoid using your full balance if possible. Missing a payment might set you back a year, but it isn’t going to kill your credit score so long as you continue using it and making on time payments.

Building Credit: Common Terms and Definitions

Terms Definitions
Building Credit The act of increasing your credit score through open accounts and on time payments.
Credit Score The number given to represent your credit report. Used to represent your credit risk and credit worthiness.
Credit Builder Loan - A loan designed to help grow credit. Consumers pay into the loan each month and only receive the loan amount when all payments have been made.
Credit Cards to Build Credit Credit cards are the fastest way to build credit. Any credit card account will allow you to build credit by paying for goods and services in advance and paying off the balance of the card at the end of the month.
Best Credit Cards to Build Credit Secured credit cards are one of the best ways to build credit, although all credit cards can be used to build credit.
Best Way to Build Credit The best way to build credit will depend on the individual. Some methods of building credit include Store credit cards, cosigned loans, and rent tracking.
How to Build/Establish Credit Fast To build your credit more quickly, start with a single account and add new accounts to your credit report every six months.
Increase Credit Score Any activity, such as opening a new auto loan, will build your credit. By building credit and making on time payments, you will be able to increase your credit score.
How to Improve Credit Score Fast There is no fast way to improve your credit score, in part because your credit score is based on age. Opening new accounts and making on time payments will help to raise your credit score. Removing inconsistencies and inaccurate information will also help to improve your score more quickly.
Authorized User An authorized user is someone whom you allow to use your credit card to build their credit. Authorized users are not responsible for paying debts on the card account.
Co-Signer Someone with good credit who signs a loan with you, making them responsible for paying your debts if you are unable to do so.
Secured Card A type of credit card used to build credit. You will need to deposit money upfront, which will be your card limit. If you are unable to make a payment, your deposit stands as collateral.
Secured Credit Advanced credit given to a consumer, backed by collateral.
Secured Debt Debt backed by collateral in order to reduce the risk to the lender.
Utilization Ratio The percentage of the balance being used on a credit card in comparison to the total balance available.
Business Credit Business credit is the credit history under the name of a business. It is separate from individual consumer credit.
Paydex Similar to the FICOs score of individuals, the Paydex score is the score given to businesses for on time payments to creditors.

Building Credit Industry Overview

Relevant National Credit Building Laws, Rules or Regulations or Recommendations

There are few laws that dictate how you can build credit. However, there are dozens of tips and resources available for anyone who wants to build credit fast. These include credit cards, credit builder loans, and becoming an authorized user on someone else’s existing credit account. But the best recommendations to follow when building credit, whether for a business or an individual, are to make on time payments and to monitor your credit score regularly. By doing so, you can catch any inconsistencies in your report and have them fixed before they can do major damage to your credit score. And by making on time payments, you eliminate the risk of a negative impact to your credit score.