How To Build Credit

A Sensible Guide To Building Good Credit

If you’ve never had a loan or a credit card account, the odds are that your credit history is virtually non-existent. And having no credit history can be almost as harmful as having a poor credit history.

Creditors and lenders use your credit history to calculate their risk in extending you credit, whether it’s a credit card, car loan, mortgage, or simple loan. If there is no information for them to evaluate, they have no way of determining your creditworthiness and therefore may deny your application for that very reason.

While it may seem like an impossible task, there are smart ways to build your credit if you are starting with none. And the rewards can mean big savings to you in the future, such as more favorable loan terms and lower interest rates.

One of the best ways to start building your credit is to get a secured credit card. This credit card can be used in exactly the same way as a regular credit card. The only difference is that the issuing bank requires you to put down a security deposit, usually in the amount of $300 to $500. This assures your creditor that you will make your payments on time and live up to the terms of your agreement. If you don’t, you will forfeit your deposit.

A secured credit card helps establish your credit history because your payment history is reported to the credit bureaus each month. How responsibly you use this credit impacts your credit report. It is very important to always make your payments on time and not to miss a payment.

A good rule is to never charge more than you can afford to pay off in full each month. Regularly paying off the entire outstanding balance shows creditors that you know how to budget and spend wisely and over time, this practice will raise your credit rating. It’s important to actually use your credit card once you have it. Creditors want to see activity on the account and payments made in a timely manner.

So in the beginning, start small with your purchases. One or two purchases each month is perfectly acceptable- filling up the gas tank or an inexpensive meal. The point is to show creditors that you can handle debt and be trusted to make your payments on time.

It can’t be stressed enough that you have to make your payments on time, each and every month. This is the single most important factor in building good credit. Just one late payment, especially when you are just starting out, can severely damage your credit score.

Don’t apply for a lot of credit within a short period of time. Each time you submit an application for credit, it is reported to the credit bureaus and your credit score is affected negatively. It’s better to start with just one card and demonstrate that you can manage it soundly. You can always apply for another type of credit once your history is more established.

After about six months of making timely payments, order a copy of your credit report from the three major credit bureaus. You are entitled to one free copy a year from each agency. Check it thoroughly to make sure the information is accurate and complete. You should do this at least once a year to maintain a clear picture of your financial situation.

Once you have had your secured credit card for a year and used it wisely, you can approach your lender about getting a regular, unsecured credit card. This card will most likely have a higher credit limit and may offer reward points or other extras. Your security deposit will also be returned to you, so perhaps think about opening a savings account with those funds.

Patience is the key to building a solid credit history. You have to take small steps at first but the rewards are worth it. The smart choices you make in the beginning can add up to big savings down the road.

For more information on learning to use credit wisely, check out Credit FAQs.