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Jan

2023

Guide to Starting an Investment Club

By Anna Davies | Growing Wealth, invest, Investing | Comments Off

An investment club is a group of individuals who discuss the financial markets and make investments. They typically meet regularly to discuss and decide on investment strategies and opportunities. People start and join investment clubs to learn about investing and potentially achieve higher returns than they would by investing on their own.

Maybe you and your coworkers spend breaks discussing the market, or you’re constantly texting friends about financial moves. Or perhaps you want to raise capital for specific stock. Whatever the reason, you may be thinking about starting an investment club to learn more about the financial markets, socialize, and potentially make a profit. Below we lay out some of the steps to start an investment club.

What Is an Investment Club?

An investment club is a novel way for people to come together and help one another reach their shared financial investment goals by discussing them and working together to make them come to fruition. Talking through what-ifs, gathering advice, and learning from other people can be one way to broaden an investor’s knowledge base and alert them to popular investment trends, like investing in cryptocurrency or impact investing.

Typically, an investment club can take on one of two forms, depending on the interest and goals of club members. Some investment clubs pool their money, and the group invests as one unit. Other investment clubs, sometimes called self-directed investment clubs, meet to discuss strategy or invite speakers to share on various topics, but each investment club member makes stock investments independently.

For investors who decide to pool resources and invest as a group, it’s important to understand any regulations and guidelines. Depending on the structure of the investment club, it may be necessary to register with the Securities and Exchange Commission (SEC) as an investment company. Additionally, setting up the investment club as a legal partnership or limited liability company may be necessary.

How Many Members are Usually in an Investment Club?

The number of members in an investment club can vary, but they typically have between 10 and 20 members. Some clubs may have more or fewer members depending on their specific goals and the amount of capital they have to invest.

The size of the club can also be influenced by regulatory restrictions and compliance requirements, as well as the availability of potential members and the size of their financial resources.

How to Start an Investment Club: 4 Steps

The following are some of the initial steps you should take if you’re interested in starting an investment club:

Step 1: Decide On The “Why”

The first step in starting an investment club is figuring out the purpose of the club. Understanding and agreeing on the motivation behind the investment club can help like-minded members craft a mission statement and bylaws.

There are many reasons for starting an investment club. Some people want to invest with friends to pool resources and enjoy the camaraderie that comes with a mutual goal. Others want to explore specific areas, such as impact investing, or invest in alternative investments, such as startups or mineral rights. There are several reasons to start an investment club.

A frank discussion can help narrow focus and weed out members who might be happier in a club with different goals. These discussions can also be a good time to discuss the financial commitment of the investing club. Some clubs may have annual membership fees for club expenses such as speakers, meeting space, and supplies and a monthly expected contribution to earmark for investing.

Step 2: Observe Existing Investment Clubs in Action

Once you’ve decided on the “why” of your club, seeing a few investment clubs in action can be helpful. Browsing stock market forums or performing an online search may help you find clubs in your area. There also may be “model clubs” that are open for observation.

Pay attention to how these club meetings are run, including the format and structure. For example, you may notice whether clubs have guest lecturers or if they operate casually or formally. This will give you and your club members a sense of how you’d like your meetings to go.

Step 3: Kick Things Off with Informative Sessions

Before getting deep into group investing, it may be helpful to have several investment club meetings without pooling funds. These club meetings can include a speaker’s series or an open forum opportunity to discuss approaches to the market, and can be a good way to assess whether or not taking the next step and forming an investment club makes sense.

Step 4: Create a Legal Framework

Many investing clubs operate as a business entity, either as a Limited Liability Company (LLC) or Limited Liability Partnership (LLP). It can be helpful to create a legal framework for your investment club that clarifies and addresses specific financial questions, including:

• Will returns be reinvested or distributed to members?

• What happens if someone decides to leave the club?

• How will investment decisions be made?

The answer to this last question may also change whether your investment club must register with the SEC. For example, if you have one club member making investing decisions, or one member providing investment advice to the rest of the club, that person may need to register as a financial advisor with the SEC. There may also be state-specific securities requirements that a club may need to comply with.

You should also ensure you clearly understand the tax implications of investments and profits.

Creating membership bylaws, even if your club is an informal group of friends and acquaintances, can help ensure everyone is on the same page and there is a clear understanding of the investment club’s finances, commitments, and purpose.

Do Investment Clubs Pay Taxes?

Investment clubs or their members have to pay taxes on any income they earn from investments. The specific tax rules that apply to an investment club will depend on how the club is organized.

If an investment club is organized as a partnership, the club itself does not pay taxes on its income. Instead, the income is passed through to the individual members, who must report their share of the club’s income on their personal tax returns. If the investment club is organized as an LLC, the club will be taxed as a corporation.

In any case, investment clubs must file an annual tax return, and members must report their share of the club’s income on their individual tax returns. They must also report any capital gains or losses from the sale of investments on their tax returns.

Pros and Cons of Starting an Investment Club

Pros	Cons
Pooled resources increases investment capital	Potential for fraud
Provides a learning opportunity	Conflicts with other members
Can be a fun social activity	Complex tax situation

Pros of Investment Clubs

Investment clubs have many advantages, especially when compared to an individual investing alone without outside help. The following are some of the benefits of an investment club:

• Pooled resources: Investment clubs allow members to pool their resources together, giving them access to a larger pool of capital to invest with. This can increase the potential for higher stock market returns and diversification of investments.

• Learning opportunity: Investment clubs provide an excellent opportunity for members to learn about different investment strategies and opportunities. Members can learn from each other’s experiences and expertise and discuss different investment options and ideas.

• Social interaction: Investment clubs can also provide a social element, as members meet regularly and discuss investments and strategies. This can be a fun and engaging way to learn about investing.

Cons of Investment Clubs

Investment clubs also have risks, including the following drawbacks:

• Risk of fraud: Investment clubs are generally not regulated by the SEC, and members should be aware that there is a risk of fraud or mismanagement of funds. Before investing, members must perform due diligence and research the background of the club’s organizer and members.

• Potential for conflicts: Investment clubs can also be prone to disputes among members, particularly when making investment decisions or dividing profits if club rules are not formally adopted.

• Complex tax situation: Investment clubs can have a complicated tax situation, and members may be responsible for reporting their share of the club’s income on their individual tax returns. This can be confusing and time-consuming, and members should consult with a tax professional to understand the tax implications of being a member of an investment club.

Investment Club Alternatives

There are several alternatives to an investment club for individuals who want to invest and learn about investing. Some of them are:

• Individual investing: Investing on your own through a brokerage account is always an alternative to pooling resources in an investment club. Investing on your own allows you to purchase individual stocks, bonds, or mutual funds without compromising with members you disagree with.

• Robo-advisors: Robo-advisors are digital platforms that provide automated investment advice and management. They can be a good option for individuals who want to invest on their own but want the help of technology to make investment decisions.

• Financial Advisor: Hiring a professional investment manager or financial advisor to manage your investments.

The Takeaway

Starting an investment club has the potential to be rewarding in many ways. For instance, developing and discovering investing strategies with peers can be beneficial and enjoyable. In some cases, pooling resources to invest together can bring members closer to their individual financial goals.

There are other options for investors who don’t have the bandwidth to start up a self-directed investment club. Talking stock tips at the water cooler is one classic strategy, but another option is to join platforms that allow you to “watch” your peers’ investment moves in real-time.

For example, an online brokerage account with SoFi Invest® allows you to follow people’s investment moves. This feature hides actual dollar amounts, but allows you to view watchlists of other participants, view people’s SoFi Invest activity, and see your own investments play out on a dynamic leaderboard. This can be a way to actively participate in the market together while keeping your finances separate.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

Do investment clubs make money?

Investment clubs can make money if the investments they make are profitable. However, like any other investment, they can also lose money if the investments do not perform well. It’s important to do research and perform due diligence before investing in an investment club, as there are no guarantees of profitability.

Do investment clubs pay tax?

Investment clubs are generally required to pay taxes on their income. The exact type and amount of taxes owed will depend on the type of investment club and the income it generates. Generally, investment clubs are treated as partnerships or corporations for tax purposes and must pay taxes on their income.

How do I start an investment club for fun and profit?

To start an investment club, you’ll need to recruit a group of like-minded individuals interested in investing and pooling their resources together. You’ll also need to decide on a legal structure for the club, such as a partnership or limited liability company, and establish rules and guidelines for making investment decisions and managing the club’s finances. Additionally, you should research and consult a financial professional and attorney to ensure you follow all the legal and regulatory requirements.

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Jan

2023

Does Paying for Your Car Insurance Build Credit?

By Dan Miller | credit card, Insurance | Comments Off

You might think that paying for your car insurance each month affects your credit in the same way that paying other recurring bills does. In most cases, paying for car insurance does not help build credit. This is mostly because car insurance is not an installment loan, so it isn’t reported to the major credit bureaus.

However, if your insurance account goes delinquent and is sent to collections, that could have a negative impact on your credit score. In this way, car insurance does have the potential to affect your credit score.

How Does Paying Car Insurance Work?

Like most types of insurance, car insurance works by making monthly (or annual) premium payments to the insurance company. Then, if you are in an accident that is covered by your policy, the insurance company may pay to repair or replace your vehicle, subject to the deductible listed on your policy.

Every car insurance policy is different, so work with your agent to make sure you understand how your particular policy works.

Paying Car Insurance With a Credit Card

Many insurance companies do allow you to pay for your car insurance with a credit card. However, it’s possible that your company may only allow payment by cash, check, or bank transfer.

If you do pay for your car insurance with a credit card, make sure that you are including that amount in your monthly budget. That way, you can make sure to have enough money in your bank account to pay your credit card statement in full.

How Your Credit Score Can Be Affected by Paying Car Insurance

While your regular and on-time car insurance payments likely will not have an effect on your credit score, that doesn’t mean your score can’t be impacted by paying car insurance. Specifically, your credit score can be affected by not paying your car insurance premiums. If your insurance agency sends your account to a debt collection agency, that could result in negative impacts to your credit score.

Does Paying Car Insurance Help Build Credit?

As we’ve mentioned before, paying your car insurance does not usually help with building credit. So if you’re hoping to do so, you’ll need to look at other avenues, like making regular on-time payments to your creditors. Additionally, paying off a debt affects your credit score by lowering your debt-to-income ratio and your overall credit utilization, so that could be another avenue to consider.

Factors to Consider When Paying Car Insurance With a Credit Card

The biggest factor to consider if you want to pay your car insurance with a credit card is whether or not your insurance company accepts credit card payments. While many insurance agencies do, some do not. If your agency does not take credit card payments, you’ll have to find an alternative way to pay your bill.

Additionally, you’ll want to make sure that you have the money budgeted to pay off your credit card balance in full when it comes due. That way, you’ll avoid accruing interest on your car insurance payment if you used your credit card to cover it.

Recommended: How to Avoid Interest On a Credit Card

Consequences of Missing a Car Insurance Payment

If you’re significantly late with a car insurance payment and your account is sent to collections, that can negatively impact your credit score. However, the biggest consequence of missing a car insurance payment is that you may not be covered if you get into an accident. Generally, car insurance covers you only if your premium payments are up-to-date.

Additionally, if you live in a state where car insurance is required and your insurance has lapsed, you may face civil or criminal charges.

Recommended: What is a Charge Card?

Do Car Insurance Payments Appear on Your Credit Report?

Generally, car insurance payments do not appear on your credit report. This is in contrast to other types of recurring payments like mortgages or loans. However, if you make significantly late payments, your insurance company may report those late payments to the credit bureaus.

Recommended: When Are Credit Card Payments Due?

Does Your Credit Score Impact Car Insurance Rates?

While paying your car insurance does not usually impact your credit score, the reverse is not true. Your credit score can (and often does) impact the rates that you are charged for car insurance.

A lower credit score can mean that your insurance premiums are higher. That is yet another reason to work on improving your credit score by following solid financial practices.

Factors That Determine Your Car Insurance Rate

Here are some of the major factors that can determine your car insurance rate:

• Age

• Gender

• Make and model of your car

• Location (ZIP code) where you typically park your car

• Your driving habits, including how much you drive and your driving record

• The type of coverage you choose, as well as the limits and deductibles

• Your credit score

If you’re looking to lower your car insurance costs, making changes in some of the above areas can help. This could include improving your credit or driving record or reviewing your coverage needs.

Recommended: What is the Average Credit Card Limit?

Other Ways to Build Credit

Although paying your car insurance on time does not usually impact your credit, there are a few other ways you can build your credit.

Paying Your Bills On Time

One of the best ways to build your credit is by paying your bills on time, each and every month. Set up a budget and make sure that your monthly expenses are less than your monthly income. Work toward having an emergency fund to help cover you when you have unexpected expenses. Organize your bills and make sure that you pay them by their due dates.

Responsibly Using a Credit Card

Another way of establishing credit is by responsibly using a credit card. Most credit card payments and balances are reported to the major credit bureaus. Responsibly using a credit card and paying it off in full each month can help you build credit.

Additionally, some credit cards, like the SoFi Credit Card, offer rewards, such as cash-back rewards, with each purchase. Those rewards can serve as a bit of extra income each month to help you meet your financial goals.

Taking Out a Personal Loan

When potential creditors look at your credit report, many of them are looking for evidence that you can be trusted to pay your debts. If you don’t have many items on your credit report, lenders may not be sure if you’ll be responsible with additional debt. Taking out a personal loan (and then responsibly paying it back in full) can be one way to build your credit.

The Takeaway

While having and paying for car insurance is important if you regularly drive a vehicle, it usually won’t have much of an impact on your credit score. However, if you don’t pay your insurance premiums when they’re due, your account might be sent to collections, which can negatively impact your credit score. If you’re looking for ways to build your credit, you might consider getting a personal loan or opening and responsibly using a credit card.

When you’re ready for a new credit card, you can consider a cash-back rewards credit card like SoFi’s credit card. With the SoFi credit card, you can earn unlimited cash-back rewards if you’re approved. Then, use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

Can unpaid car insurance affect my credit score?

Yes, unpaid car insurance can negatively affect your credit score. If you make significantly late payments, your insurance company might report the late payments to the credit bureaus. If your account becomes too delinquent, it may be sent to collections, further impacting your credit score.

How does my credit score impact my car insurance rate?

Many insurance companies do consider your credit score and credit history when determining the rates you pay for car insurance. As with many financial products, having a good credit score can help you to pay lower monthly premiums for car insurance.

Can I get car insurance with low credit?

Yes, it is possible to get car insurance with low credit, though your monthly premiums may be higher than those of a similar applicant with better credit. If you’re looking at lowering your car insurance, one option is to raise your credit score. You could accomplish this through paying down debt, examining your credit report for inaccuracies, or being more regular about making on-time payments to your creditors.

Photo credit: iStock/Believe_In_Me

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Jan

2023

Does Financing a Car Build Credit? How Car Loans Affect Credit

Does Financing a Car Build Credit? How Car Loans Can Affect Your Credit Score

By Dan Miller | Credit, credit card, Family Finances | Comments Off

If you’re like the millions of Americans who have an outstanding auto loan, you may be wondering how your car loan affects your credit. Applying for and having a car loan does affect your credit, as long as the loan is reported to one of the major credit bureaus.

Like with most other debt obligations, responsibly making on-time payments can help your credit score — in this, way financing a car can build credit. On the other hand, making late or missed payments can hurt your credit score, as can the hard pull of your credit report that potential lenders conduct when you apply for an auto loan.

Recommended: When Are Credit Card Payments Due?

How Does Car Financing Work?

While it is possible to pay for a new car with cash, it’s common for many potential auto buyers to use car financing. You may get a car loan for the full purchase price, or make a down payment and get a loan for the rest of the amount.

The lengths of car loans vary but are commonly 48, 60, or 72 months. After making your payments for the balance of the loan, the loan is paid off and you take full ownership of the car.

Note that your car acts as collateral for an auto loan. This means that if you fail to repay the amount borrowed, the lender can take your car to recoup its losses.

How Financing a Car Can Affect Credit Positively

Most car loans are reported to the major credit bureaus, and your payment history and balance is usually included on your credit report. Making on-time payments on your car loan can have a positive impact on your credit. Potential lenders want to see a history of reliably paying your debts, and making payments on a car loan can help with establishing that.

Another factor that makes up your credit score is having a healthy mix of different types of credit. This can be another reason why having an active auto loan can help build credit, as it adds to the types of credit you have.

How Financing a Car Can Affect Credit Negatively

Just as making on-time payments on your car loan can have a positive impact on your credit score, missed or late payments can affect your credit negatively.

Additionally, when you initially apply for an auto loan, the lender will conduct a hard pull on your credit report to verify your creditworthiness. This can drop your credit score by a few points, though those drops usually only last a few months. If you’re working with multiple lenders, keep in mind that hard credit pulls by multiple lenders in a short period of time will usually get combined.

And while paying down debt is often a good idea, paying off a car loan affects your credit in some additional ways. If you don’t have other debts or loans, it’s possible that paying off your loan can have a negative impact on your credit score. This is because your on-time payments no longer get reported, and you’ll have one fewer type of credit to your mix. Additionally, if you took out your car loan a while ago, paying it off can impact the average age of your open accounts, which also influences credit.

Factors That Influence Your Credit Score

The biggest factor that influences your credit score is your payment history. Potential lenders want to see that you reliably pay your debts, and making on-time payments is one way to show that. Other factors that influence your credit score are:

• Your average age of accounts

• Credit mix

• How much you owe

• How many recent inquiries appear on your credit report

Tips to Build Your Credit Score

If you’re wondering, ‘does a car payment build credit?’, then you’re likely hoping to boost your score. Here are some tips to consider to build credit:

• Make sure that you always pay your bills on time.

• As you apply for new debt or credit, only apply for loans that you know you have the financial ability and discipline to pay.

• Aim to keep your credit utilization — the amount of your total credit you’re using — at 30% or lower. Having a higher credit utilization rate can negatively affect credit.

• Remember to check your credit report at least once a year. Not only can this help you to monitor your credit health and understand the impacts of various activities on your credit, it can help you spot any errors or fraudulent activity.

Recommended: Credit Score Needed to Buy a Car

Mistakes to Avoid When Financing a Car

One of the biggest mistakes that you can make when financing a car is applying for a higher loan amount than you can afford. When you take out a car loan, you’re making a multi-year commitment to make those monthly payments. If you take out a loan for more money than you can reasonably afford, you run the risk of destabilizing your overall financial situation and ending up in a situation where you make late payments or, even worse, miss payments.

Recommended: Average Payment for a Car

Is a Car Loan a Wise Option to Build Credit?

A car loan can be a good option to build up your credit. Remember, what potential lenders are looking for when they look at your credit report is a history of meeting your debt repayment obligations. A car loan that you regularly pay on-time can be a great way of showing that you are reliable.

Follow our tips for getting a car loan to give you a head start toward building your credit.

Other Ways to Build Credit

Aside from turning to car financing to build credit, here are a few other ways to build credit that you might consider.

Become an Authorized User

Another way that you can build credit is by becoming an authorized user on someone else’s credit card account. When you are an authorized user on a credit card account, you’re not financially responsible for paying the statement, but it still shows up on your credit report. Keep in mind that how the primary account holder manages their account can affect your credit score, either positively or negatively.

Consider a Personal Loan

Another option to build credit is by taking out a personal loan. Unlike a car loan, which is considered a secured loan since the car itself acts as collateral for the lender, a personal loan is an unsecured loan. That means that there is no collateral for the lender to seize if you stop making payments.

In certain situations, this can make a personal loan a great option for building credit. In fact, if an auto loan isn’t the right option, you can consider getting a personal loan for a car.

Apply for a Credit Card

Responsibly using a credit card and paying it off in full each month is another way that you can establish credit. Your credit card balance and payment history are typically reported to the major credit bureaus.

Additionally, some credit cards, like the SoFi Credit Card, offer rewards, such as cash-back rewards, with each purchase. Those rewards can be a boost to your monthly budget.

The Takeaway

If you take out an auto loan to buy a new or used car, it will typically get reported to the major credit bureaus. That means making on-time payments on your auto loan can help you build credit. Similarly, late or missed payments can have a negative impact on your credit score.

Applying for a credit card and making regular payments can be another way to build your credit. When you’re ready for a new credit card, consider a cash-back rewards credit card like SoFi’s credit card. With the SoFi credit card, you can earn unlimited cash-back rewards if you’re approved. You can use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

Does paying off a car loan help build credit?

While making regular payments on your car loan helps you build credit, paying off your car loan doesn’t always have the same impact. When you pay off your car loan, you no longer have the monthly payment history showing up on your credit report. Still, paying off a car loan can be a good financial move since it helps lower the total amount of your debt.

How can I keep my payment within my budget when financing a car?

The monthly payment amount of your car loan will depend on a variety of factors — the total purchase price of the car, your down payment, the length of the car loan and your interest rate. If you want to keep your monthly payment below the average payment for a car, you can get a cheaper car, make a higher down payment, or take out a longer loan. You can also work on raising your credit score to hopefully qualify for a lower interest rate.

Recommended: How to Avoid Interest On a Credit Card

How fast can a car loan raise my credit score?

While taking out a car loan can possibly build your credit, you shouldn’t count on an immediate positive impact. In the short-term, it’s possible that your credit score may decrease from the new credit inquiries and the additional debt that shows up on your credit report. However, over time, making regular and on-time payments on your auto loan could improve your credit score.

Does leasing a car build credit?

Most lease payments are reported to the major credit bureaus. That means that regular, on-time payments can help you build your credit in a similar manner to buying a car with a car loan. However, if you make late payments or miss payments on your lease, it can have a negative impact on your credit score.

Photo credit: iStock/Zorica Nastasic

Jan

2023

How Long Does It Take to Build Credit?

By Dan Miller | Credit, credit card, Financial Independence | Comments Off

Building good credit (or any credit at all) doesn’t happen overnight. Instead, you may need to have an open credit account for around three to six months before you first get a credit score.

From there, a good credit profile and good credit score can take awhile to build up. In reality, it’s much easier to lower your credit score, which is why it’s vital to aim to make solid financial choices, like consistently paying your bills on time. Building and maintaining good credit isn’t always easy, but by following a few simple steps, you can put yourself on solid ground.

How Long It Can Take to Build Credit From Scratch?

The exact length of time it takes to build credit from scratch varies by credit card issuer. That being said, it’s usually around three to six months from the time you first open a credit account.

Even though establishing and building credit can take time, it’s worth it as a way to improve your overall financial situation. Having good credit can make it easier to get approved for loans and secure lower interest rates.

Recommended: How to Avoid Interest On a Credit Card

4 Ways to Build Credit

If you’re hoping to begin building credit, here are some tactics you might consider.

Become An Authorized User

One way to help build your credit is by becoming an authorized user on an account of someone who already has good credit. This might be a trusted friend or family member. As they make on-time payments, that can have a positive impact on your credit score as well. Just know that if they miss or make late payments, that can also negatively impact your credit.

Recommended: When Are Credit Card Payments Due?

Apply For a Credit Card

If you’re getting a credit card for the first time, know that it is possible to apply for and get approved for a credit card with no existing credit history. However, you do need to be selective about which card you apply for. You’re unlikely to get approved for a premium or luxury credit card if you don’t already have excellent credit.

Still, there are credit cards that are marketed toward those who have no credit or a limited credit history. You might also consider a secured credit card, where you put down a refundable security deposit that then serves as your credit limit.

If you can get approved for a credit card, using that card responsibly, such as by making on-time payments, can help you build up your credit.

Recommended: Time It Takes to Get a Credit Card

Get a Cosigner

If you aren’t able to get approved for a loan on your own, you might consider applying for credit with a cosigner. Using a co-signer with good credit can help improve your chances of getting approved for a loan.

Then, if you reliably make on-time payments, that will get reported to the major credit bureaus and hopefully help you start building your credit score.

Maintain Good Credit Habits

Once you have opened a credit account like a loan or credit card, it’s important to practice good credit habits. This includes paying your statement off in full, each and every month. Demonstrating a pattern of reliably paying your bills over time shows potential lenders that you’re likely to repay your debts.

Factors That Affect Credit Score Calculations

There are five major factors that affect your credit score:

• Credit utilization: Your credit utilization is the amount of the credit you’ve used compared to your total available credit. It’s recommended to keep this ratio to 30% or less.

• Payment history: This indicates how reliably you make payments on your existing accounts.

• Types of credit accounts: Having a good mix of different types of credit accounts has a positive impact on your credit score, as it indicates to lenders that manage multiple types of accounts.

• Your average age of accounts: Having a lengthy credit history is a positive sign. This shows you have experience in responsibly managing accounts.

• New credit: Opening a number of accounts or making a number of hard inquiries in quick succession can suggest to lenders that you’ve overextended yourself and are in need of funding to bail you out.

Recommended: Starting Credit Score for 18-Year-Olds

Things to Keep in Mind Before Building Credit

If you’re looking to build good credit, here are some tips on establishing credit to keep in mind.

Have a Solid Financial Plan

The first thing you’ll want to do is set up a budget. Getting a new credit card should not be viewed as a way to fix your budget or dig yourself out of a financial hole. Instead, the best way to use a credit card is as a tool of convenience for money that you already have. Make sure that you have the financial ability and discipline to pay your bills in full, each and every month.

Watch Out For Scams

Usually building credit is something that you do over a period of several months or years. If someone tells you that they can build or repair your credit quickly, it could be a sign of a credit card scam. There aren’t many shortcuts to the simple rules of just regularly paying your bills on time.

Don’t Open Too Many Accounts At Once

You might think that since opening a credit account can help build credit, opening many accounts will help build credit even faster. However, that is usually not the case. Many lenders view a high number of credit inquiries in a short period of time as a negative indicator. They may see it as a potential red flag that someone is in a bad financial situation.

The Takeaway

If you’re just starting out and have no credit history at all, you generally start without an actual credit score. It can take a few months after you open a credit account to start establishing a score. As you continue to show that you’re responsible for the credit you have, your score will likely increase. Building credit can take time, and you should be skeptical of any people or programs that say they can build your credit fast.

If you’re in the market for a new credit card, you might consider a cash-back rewards credit card like SoFi’s credit card. If you’re approved for a credit card with SoFi, you can earn unlimited cash-back rewards. You can use those rewards as a statement credit, invest them in fractional shares or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

What credit score do you start with?

There isn’t a starting credit score for those without any credit history. While you might think that you start with the lowest possible credit score (like 300) and have to build your way up, you actually don’t start with any credit score at all. As you open credit cards or other accounts, you’ll start to establish a credit history and score.

How long does it take to build a good credit score?

It usually takes anywhere from three to six months to start building a credit score after you’ve opened your first credit account. You’ll then continue to build and improve your credit by continually making on-time payments. You can always check your credit score periodically to see where you’re at on your credit journey.

How long does it take to recover from a hard inquiry on your credit?

Usually when you apply for a new credit card or other loan, your potential lender will pull your credit file. This is known as a hard inquiry. Since the number of recent hard inquiries is one factor in determining your credit score, applying for credit cards can lower your credit score. However, these inquiries typically only lower your score by a few points and drop off your report after a few months.

How fast can you build your credit in 3 months?

How fast you can build your credit depends on a number of factors. Generally, it takes a few months after you’ve opened a credit account to even establish any credit. Your credit score will improve as you continue to use your credit responsibly. It’s best to think about building credit as more of a marathon than a sprint.

Photo credit: iStock/YakobchukOlena

Jan

2023

Does Cosigning Build Credit? How Cosigning Affects Credit

By Dan Miller | Credit, credit card, Financial Independence | Comments Off

If you are working on building your credit, you may be interested in cosigning or getting a cosigner for your own credit application. In some cases, you may not be able to get approved for a loan if you don’t have any credit history. If that’s the case, one way that you can help build credit is by having a cosigner.

A cosigner is someone you know who already has established a positive credit history and a good credit score. This person is usually a trusted friend or family member. The prospective lender will consider the credit of both the primary applicant and any cosigners when deciding whether or not to approve the loan.

Recommended: What is a Charge Card?

How Does Cosigning Work?

Cosigning is one way to build credit if you don’t already have an existing credit history. When you have a cosigner, the lender will use both your credit profile and that of the cosigner to determine whether or not to approve your loan request.

Without any sort of credit profile, some lenders may not be willing to issue you credit, or the interest rates they offer may be quite high. In those cases, you may consider applying with a cosigner who already has good credit in order to increase your odds of getting approved or securing better terms.

Recommended: How to Avoid Interest On a Credit Card

Cosigning vs Authorized User

Besides cosigning, becoming an authorized user is another way to help build credit. Here is a quick look at how the two approaches differ:

Cosigning	Being an authorized user
The amount of debt factors into the cosigner’s debt-to-income ratio.	Debt information on an account where you are the authorized user does not affect your debt-to-income ratio.
Both the cosigner and the primary account holder are responsible for making the payments.	An authorized user is not responsible for making payments.
Both the primary account holder and the cosigner must be adults.	Children can be approved as authorized users on a parent’s account.

Recommended: When Are Credit Card Payments Due?

Does Cosigning Help Build Your Credit?

When used appropriately, cosigning can help build your credit. Just make sure to avoid these mistakes when choosing a student loan cosigner, or a cosigner for any other type of loan. If the responsibility is not taken seriously, it could have negative implications for both parties’ credit.

When Cosigning Can Build Your Credit

If you’re just starting out and establishing credit, using a cosigner can be an attractive option. If you have a trusted friend or family member who is willing to cosign on your loan, you may be able to qualify for a loan that you wouldn’t otherwise be eligible for. Then, as you make on-time payments on your loan, your credit score will likely improve due to a positive payment history.

When Cosigning Can Hurt Your Credit

If you find yourself needing a student loan cosigner or any other type of cosigner, it’s important to also understand the potential downsides of cosigning. While being a cosigner does not affect your credit in and of itself, it is possible to damage your credit by cosigning.

When you cosign a loan or credit card, both the primary applicant and the cosigner are liable for the debt. You may find yourself in a situation where your credit is harmed because the other party fails to make regular payments when required. So, depending on your situation, you may be better off with a student loan application without a cosigner.

Things to Know Before Cosigning

The most important thing to know before cosigning is that cosigning on someone else’s loan does come with some risk. While cosigning can make sense to help a friend or family member who is starting out in life, it’s riskier to cosign for someone who already has bad credit.

If someone has bad credit, then they likely already have a history of not reliably meeting their debt obligations. Make sure you fully understand the situation before cosigning a loan.

Other Ways to Establish Credit

Besides getting a cosigner, there are a few other ways to establish credit.

Open a Secured or Credit-Building Credit Card

There are also some types of credit cards that are marketed to those with a limited credit history. Often, these are marketed as either credit-building credit cards or secured credit cards. As you open credit cards and regularly make on-time payments, your credit score is likely to improve.

Become an Authorized User

If you don’t want to apply for a credit card or can’t get approved without a credit card cosigner, you can consider becoming an authorized user on someone else’s account. In this setup, only the primary account holder is liable for any purchases that are made on the account. Even if the authorized user is the one that actually makes the purchase, they aren’t financially responsible.

Get a Guarantor

A guarantor is similar to a cosigner, but there are some important differences between guarantors and cosigners. A cosigner is legally obligated and financially responsible right away to repay any debts. A guarantor, on the other hand, is more of a backup plan. The guarantor is only responsible for repaying the debt if the primary borrower fails to make payments and the loan is at risk of default.

The Takeaway

When you’re first starting out and building up your credit, you may not be able to qualify for loans. One way to help build your credit is by applying with a cosigner. A cosigner is usually a trusted friend or family member who already has good credit. Applying with a cosigner allows the potential lender to consider both people’s credit. It may help you get a loan that you otherwise wouldn’t qualify for.

When you’ve built up your credit and are ready for a credit card, you might consider a cash-back rewards credit card like SoFi’s credit card. If you are approved for a credit card with SoFi, you can earn unlimited cash-back rewards. You can use those rewards as a statement credit, invest them in fractional shares, or put them toward other financial goals you might have, like paying down eligible SoFi debt.

Apply for a SoFi credit card today!

FAQ

Does cosigning show up on your credit report?

Yes, cosigning will show up on both the credit report of the primary applicant as well as the cosigner. Any outstanding debt will be used in calculating your debt-to-income ratio, and late payments might negatively affect your credit. This is one reason that it is always important to check your credit score on a regular basis.

Does a cosigner have to have good credit?

A credit card cosigner doesn’t necessarily have to have good credit, but it’s usually more helpful if they do. The whole point of having a cosigner is to use their good credit to help an applicant with poor or no credit qualify for a loan. If the cosigner has poor credit, it may not make a difference in whether or not the applicant is approved.

Whose credit score is used when cosigning?

When you apply for a loan or credit card with a cosigner, the potential lender will use both people’s credit score and history to determine whether to grant approval. Typically, the primary applicant will have poor or no credit, while the cosigner will have excellent or good credit.

Photo credit: iStock/Sitthiphong

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