Wondering how to build credit with low income? Building credit is an important step in building wealth and achieving financial security. A credit history, and a strong credit score, can help when you want to rent an apartment, take out a loan, be approved for a higher credit limit on a credit card, or get better rates on things like car insurance. However, building credit can be tricky – you might have heard that it “takes credit to build credit” – but even if you have no credit history, there are options! Read on for Low Income Relief’s tips on how to build credit with low income.
There are a lot of resources out there about how to build credit with low income, but most of them overlook the most important step of all. Before you begin building credit, it’s important to understand how credit and personal finance work. The complicated details of personal finance are not typically taught in school, and it’s even taboo to talk about money in many families, so it is understandable that many of us do not have a strong grasp on the basics of personal finance. However, there is a lot of information out there about everything from credit scores to budgeting to debt management.
Before you begin your credit building journey, take some time to educate yourself about how credit works, as well as personal finance more broadly. Some of the best financial advice I’ve received has come from trusted personal finance educators / influencers like:
- Melissa Jean-Baptiste (aka. Millennial in Debt)
- Ramit Sethi
- Trent Hamm
- Kara Stevens (aka. The Frugal Feminista)
- Farnoosh Torabi
Through these personal finance gurus and others, you might learn that it is important to keep your credit utilization (the amount of debt on your credit cards) at 30% or less. You will also learn that credit cards are not the only way to build credit. For example, some credit monitoring companies like Experian allow you to link some of your monthly bills to their system to demonstrate that you have a consistent payment history.
Finally, when it comes to personal finance education, make sure you know what your credit score is and why. By setting up a free account with a credit monitoring company like Experian, Equifax, TransUnion, or Credit Karma, you will be able to see what your credit score is, what is affecting it, and learn tips to improve it.
Get a Secured Credit Card
As you probably know, getting a credit card without credit (or without good credit) is not easy. However, one option for those of us without a credit history or a stellar credit score is to apply for what is called a secured credit card.
Secured credit cards require the applicant to put a deposit down (usually about $200) when they receive the card. That reduces the risk to the credit card issuer because they can draw from the deposit if the borrower fails to pay on time.
If you are worried about overspending because you have access to a line of credit, a secured credit card can be a good option because the limit for spending will only be as high as the amount you deposited up front.
One thing to look out for if you take on an unsecured credit card is that their APRs (annual percentage rate, or interest rate) are often higher than those of secured credit cards.
When you’re making a plan for how to build credit with low income, getting a secured credit card can be a step in the right direction if you feel it is right for you.
Become an Authorized User
Becoming an authorized user on someone else’s credit card is another way to build credit with a low income. If you have a trusted family member, friend, or partner who is willing to add you as a user to their credit card, you can benefit from their good credit.
You don’t necessarily need to use their credit card or line of credit, but each month when information is reported to credit bureaus, the information about their credit will be added to your account, boosting your credit score.
If this is an option you choose when you make your plan for how to build credit with low income, then it is important to be sure the person whose account you are added to has very good credit and that it is likely to stay that way as long as you are a user on their account.
More Tips from Low Income Relief
When you’re first learning how to build credit with low income, there are a few things to keep in mind.
- On time payments, on time payments, on time payments: This is among the most important factors in building credit. To the extent you are able, pay your bills on time.
- Hard credit inquiries negatively affect your credit. A hard credit inquiry happens when you apply for a line of credit and the lender officially requests information about your credit from credit bureaus. That said, apply for credit cards and other lines of credit sparingly.
- Try to be optimistic. How to build credit with low income differs for each person, but the good news is, it doesn’t take much time to start to see improvement. Checking your credit score each month through one of the credit monitoring agencies (e.g. Equifax, Credit Karma, etc.) can help you stay motivated.
Taking charge of your credit is possible! We hope Low Income Relief’s tips for how to build credit with low income help you in your journey toward financial security. Check out some of Low Income Relief’s other resources on personal finance, like our article on second chance banking, how to get free money, and debt management.