Every once in a while someone tells me they needed to buy a new car and take out a loan in order to build credit.
To me, this is one of the most potentially harmful misconceptions of personal finance.
- You do not need to go into debt to prove you can handle debt, in order to earn a good credit score.
- If you have a low credit score, say 600, taking out a car loan and making payments for 5 years will not get you to 800.
- If you have a shitty credit score or a sparse history with credit, you are not going to get a favorable interest rate on a loan. You will end up paying a lot more for whatever it is you’re buying.
If you really are trying to build credit–whether you’re a young person just starting out, a recent immigrant to this country with a fresh SS#, or you’re recovering from a bankruptcy—there are efficient and cost-effective ways to do so. Justify your fancy car purchase another way, please.
The best thing you can do is open a secured credit card.
Put a recurring bill on it like Netflix or your cell phone bill, set it up for auto-pay, and let that thing ride. Don’t use it for anything else. You want your overall credit utilization % to be low. If your secured credit card has a limit of $500, don’t have more than $50 on the card each month when your statement closes.
The next best thing you can do is wait.
It takes time to establish good credit. Like, years.
The other next best thing you can do is use Credit Karma, Credit Sesame or Nerd Wallet to monitor your credit.
Once your score starts moving up and you’ve got some history of being reliable under your belt, you’ll be unstoppable.