5 Ways to Build Credit for Low-Income Workers

Even if you earn a low income, there are several ways to build credit within your affordable limit. Credit is not linked to income. You have a wonderful opportunity to be a strong borrower, enhancing your financial resources despite your income level. Consider these techniques to enhance your credit at any income level.

#1 Avoid Bad Debt

First things first: avoid bad debts. Bad debts have one of three main criteria: one, you cannot afford them; two, they do not build your asset base; three, they do not help your credit score. In order to qualify as a "smart" debt, the loan you are taking should not fit any of these criteria. As long as you can afford the loan, it builds your assets, and it helps your credit score, then you are on the right track to a good debt.

#2 Use a Credit Card

One type of debt that may help you is a revolving credit line available through a credit card. If you earn a low wage, you may not be approved for high limits. This is no problem because you do not need high limits to use a credit card well. In fact, maintaining a low balance will help your credit faster. Start by using the card for every day purchases, and pay down the balance each month. Many borrowers make the mistake of putting large, luxury purchases on a credit card. When you do this, you run the risk of buying something you simply cannot afford. Stick with the basics, and always pay down your balance.

#3 Take an Installment Loan

Your credit score will grow faster if you have a number of different types of loans on your record. Revolving debt is just one type of debt; it is best to also take installment loans from time to time. These are issued in a fixed amount paid off through installments, either monthly, quarterly or even annually. If you are purchasing a small electronic item, consider taking a low interest installment loan. You can pay off a camera or a computer, for example, in a short period of time. Even with a small interest rate, you will benefit from taking the installment loan when you are looking to really build your credit.

#4 Focus on Debt to Income Ratios

Since your income is low, you should always be aware of your debt to income ratio. Never allow yourself to rack up debts that amount to more than 30 percent of your monthly income. This can put you at risk of nonpayment should you have any unforeseen expenses. It will also cause a reduction in your credit score if you have too much debt.

#5 Consider Federal Loan Opportunities

Federal loans are often made available to low income earners with good credit. If you have succeeded in building your credit, you can apply for loan programs through the Department of Education or the Federal Housing Authority, depending on your needs. These loans are given independent of how much you earn, and they are a great way to continue building your positive credit base.



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