A Beginners’ Guide to Building Credit Score

Know the Basics of Credit

Before you start building credit, it is essential to understand what credit exactly means. Given below is the list of words and terms you should be acquainted with – 

Credit :

It refers to the money you have lent from a bank or a lending institution or the purchases you make using a credit card 

Creditors :

These are the organisations from where you borrow money such as banks, retailers, or credit card companies

Credit Report :

This is a comprehensive report that contains details of your borrowing history. It provides insights into your credit history and the number of credit accounts that you possess. 

credit Score :

This is a three-digit number that helps lending institutions determine your creditworthiness. Your credit score is computed based on several factors like payment history, length of credit history, credit utilisation, and so on. 

It is necessary to start building credit early on in your life so that your credit score is not negatively affected in the future.

Get a Credit Card

If you are just initiating your credit-building journey, you can consider securing a credit card. With different types of credit cards being available, it is important for you, as a beginner, to opt for a card that does not charge any annual fee or requires you to pay high interest. 

Mentioned below are some credit card options you can go for – 

Secured Credit Card :

Several credit card companies provide secured credit cards for people who need to build or rebuild their credit. To apply for a secured credit card, you would be required to submit a refundable security deposit with the bank that you will get back once you close your account. One of the major reasons to get a secured credit card is that you won’t be charged any annual fee with most secured credit cards. 

Student Credit Card :

Various credit card providers offer student credit cards to eligible college students, with some credit cards providing reward schemes and charging no annual fee. They are similar to unsecured credit cards and do not require any security deposit. 

Note: If you are a student under the age of 21, you would need a co-signer to secure the card unless you have any steady income source in most cases

Become an Authorised Credit Card User

If getting a credit card is becoming a challenge, you can ask a family member (like one of your parents) to add you as an authorised credit card user for one of their cards. This way, you would be able to receive a credit card in your name that is mentioned in the account. The company will start reporting the account’s details to the al etihad credit bureau (AECB) under your name, which will add you to the bureau’s database. 

Different credit card companies have different policies. It is, thus, advisable to check with the company if it reports the information of the authorised credit card users to the credit bureau. Make sure you become an authorised user of a credit card whose primary holder pays the bill on time and has a low credit card balance.

Make Timely Payments

Paying your bills on time and in full is the best way to build your credit. You can start paying your credit card bills from the start when you acquire a secured credit card, as this can help you maintain good credit throughout life. To avoid a big credit card bill at the end of the month, it is recommended to create a budget and stay within the financial limits. 

While you create your budget, make sure you include all the necessary payments and not just your credit card bill – all the payments make up your payment history. Consequently, your credit history can get affected in case any bill related to your rent, utility, or phone number is not paid or delayed. Several companies end up reporting such payments on your credit history.

Keep Your Credit Utilisation Low

Your credit utilisation rate also affects your credit score. As per financial experts, you should keep the credit utilisation rate less than 30%. This way, you will not be charged more than what you can afford to pay back each month.

Start a Loan

Another easy way of building your credit is to secure a loan from an authorised lender that sends a report to the credit bureau. A few types of loans that you can consider are – 

Student Loans :

A student loan enables students to build their credit while pursuing their higher education. Most student loans don’t require a credit check and can be easily approved even if you do not have an existing credit history. This loan, however, will get reported to the Al Etihad Credit Bureau and will help you build your credit history.

Credit-builder Loans :

Several banks, credit unions, and other lending institutions provide credit-builder mortgages to people who want to build their credit. This loan can be considered similar to a secured credit card. Here, the lender holds onto the funds as a security against the loan. Once the borrower has repaid the loan, the secured funds are released. 

It is crucial to note that the credit builder loan has an application fee and a significant interest payable.

Upgrade to a Conventional Credit Card

After you repay (on time) your secured credit card bill for about 6 to 12 months, you can upgrade to a traditional credit card and continue building your credit. You will get back your security deposit as long as you have paid the balance in full. 

At the same time, it is necessary to remember that traditional credit cards have a higher credit limit. Thus, it is better to use the card wisely and up to an amount that you can pay back.

Key Takeaways

• If you are just starting your credit-building journey, you should get a credit card. However, as a beginner, it is important to opt for a card that does not levy any annual fee or charge high interest. You can go for secured credit cards or student credit cards. 
• To apply for a secured credit card, you need to provide the bank with a refundable security deposit. You will get the deposit back once you close your account. It would mean that you do not owe any money to the lending institution and have paid the balance in full. 
• If you are finding it difficult to get a credit card, you can request a family member to include you as an authorised credit card user for one of their credit cards. This way, you can receive a credit card in your name and an update will be made to the account. The company will start reporting the account’s details to the Al Etihad Credit Bureau under your name, which will add you to the bureau’s database. 
• Paying your bills on time and in full is yet another way to build your credit. You can start paying your credit card bills from the start when you acquire a secured credit card, as this can also help in maintaining good credit throughout life. To avoid a big credit card bill at the end of the month, it is recommended to create a budget and stay within the financial limits. 
• Another way to build your credit is by securing a loan from an authorised lender that sends a report to the credit bureau. You can either opt for a student loan or a credit-builder loan. 
• After you have timely paid off your secured credit card bill for about 6 to 12 months, you can upgrade to a traditional credit card and continue building your credit.

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