How to create a loan using a credit card
The most popular way to start building credit is with a credit card. Whether it’s a secure or unsecured card, using a credit card correctly can be a great way to establish a payment history and demonstrate your ability to manage your finances.
Apply for your first credit card
When banks and financial institutions issue credit cards to consumers, they take on a certain level of risk that the cardholder may not be willing or able to pay off their debt. This risk is higher when consumers do not have an established credit history, which means that those without credit are likely to find it difficult to get approval to use unsecured credit cards, that is, traditional cards that have no collateral.
This is where secured credit cards come in handy. Secured cards function similarly to traditional cards, but require the user to make a cash deposit at the time the card is opened. This cash deposit is directly equivalent to the credit limit. For example, let’s say you make a $ 500 deposit when you receive a secured credit card. The bank or financial institution holds this money, and your credit limit is now $ 500, which you can slowly use and make payments. This minimizes your bank’s risks because if you stop paying your credit card bill, they will deduct your debt from your initial deposit. This security is what makes it easier to get approval for people who are low on credit right now.
While secured cards may seem restrictive, they are a great way to start building up your credit as they allow you to make monthly payments that will steadily improve your credit score over time. If possible, the ideal option is to pay the full monthly balance of the card. If you are unable to pay them in full each month, make sure you at least make the minimum payment on time, as missed or late payments will lower your credit score. Therefore, make sure that your card is being used correctly and not mistakes are made extremely important.
Become an authorized user of someone else’s credit card
If you’re having trouble qualifying your own credit card, your best option might be to become an authorized stranger user. This happens when someone you know – usually a family member – adds your name to their existing account. This gives you the ability to make purchases with your card without having to bear responsibility for payments.
But this is only a good idea if you can be sure that the cardholder will make payments on time. Why? When the primary card user pays their bill each month, that payment will also be reflected on your credit report, ultimately boosting your bill. On the other hand, this means that if the cardholder misses payments or makes them late, it could end up damaging your credit rather than helping them.
Don’t miss a single payment
Lenders want to know that you are capable of making timely payments, so the importance of avoiding missing payments should not be underestimated when establishing a loan. Missed payments will negatively affect your account, so when shopping with a credit card, you should always know exactly when and how you can make your next payment.