9 Ways To Build Credit From Scratch
Establishing a good credit history has never been as important as it is today.It's not just that you'll need good credit to get decent rates when you're ready to buy a home or a car. Your credit history can determine whether you get a good job, a decent apartment, a deal on your cell phone and reasonable rates on insurance. One seemingly minor misstep -- a late payment, maxing out your credit cards -- can haunt you for years.
If you're just starting out, you have a once-in-a-lifetime opportunity to build a credit history the right way. Here's what to do and what to avoid.
Check your credit report
You'll first want to see what, if anything, lenders are saying about you. That kind of information is contained in your credit report at each of the three major bureaus: Equifax, Experian and Trans Union.Credit reports are used to create your credit scores, the three-digit numbers that lenders typically use to gauge your creditworthiness. Lenders also may look at the reports themselves, as may the landlords, employers, insurers and utility companies who use credit to evaluate applicants.
Can you have a credit report if you've never had credit? Maybe.
Somebody else's information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open bogus accounts.
If that's happened to you, you'll need to clean up your credit report before trying to apply for new accounts. The Federal Trade Commission's identity-theft site has information that can help
Establish checking and savings accounts
Here's a basic step that's sometimes overlooked by people seeking credit. Lenders see bank accounts as signs of stability.Opening checking and savings accounts is also one of the few things you can do as a minor to start building a financial history. While you can't get a credit card in your own name until you're 18 and can be legally held to a contract, many banks have no problem letting you open an account.
If your bank balks, look around for another bank or consider opening a joint account with an adult.
Understand the basics of credit scoring
You need to know that the two most important factors in your scores are:- Whether you pay your bills on time.
- How much of your available credit you actually use.
It's essential that you pay all your bills on time, all the time. Set up automatic payments or reminder systems so that you're never, ever late. All it takes is a single missed payment to trash your credit scores -- and it can take seven years for the effects to completely disappear.
You also don't want to max out any of your credit cards, or even get close. Keeping your credit use to less than 30% of your credit limits (10% is better) will help you get the best possible credit scores -- and should help keep you from getting over your head in debt, as well.
Finally, you don't need to carry a balance on a credit card to have good credit scores. Paying your bill in full each month is the best way to keep your finances in shape and build your credit at the same time.
Piggyback on someone else's good credit
The fastest way to establish a credit history can be to "borrow" another's record, either by being added to a credit card as a joint account holder or by getting someone to co-sign a loan for you.Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit scores.
If you default, however, you won't be the only one who suffers. The co-signer has basically promised to make good on this account, so any delinquencies will show up on her credit report as well.
Being added as a joint account holder also has its risks, for you as well as the person giving you access to the card.
If your father adds you to his credit card, for example, his history with that account can be imported to your credit bureau file, giving you an instant credit record. If he has handled the account well, that reflects well on you. But if he hasn't, his mistakes would also become yours. You become responsible for any debt on the card, and it's difficult to get your name removed. Any late payments or other problems could make it harder for you to get future credit than if you'd established your history without help.
Being added as an authorized user to a credit card will no longer help you build a credit history. After credit-repair companies took advantage of the system and lenders protested, score-keeping companies are ignoring authorized-user information.
Apply for credit while you're a college student
Credit experts used to warn college students away from those booths set up on campus by credit card lenders -- the ones that promise free stuff for signing up. It turns out, however, that there's no easier time to get a card than while you're a college student, said Gerri Detweiler, author of "The Ultimate Credit Handbook."Lenders are willing to take risks with you that they won't once you graduate, probably because they know that your parents' willingness to bail you out will end once you get your sheepskin.
