Data Facts Lending Solutions Blog

Building (or re-building) Credit

by Jennifer Hamby

May 8, 2014 11:33:00 AM

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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.

 

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.

 

 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. 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 large balance on a credit card to have good credit scores. Paying your bill in full, or leaving a small rollover balance 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.
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.
You still have to exercise some caution, though. Look for a card with a low or nonexistent annual fee and low interest rates. For now, just get one: Opening a slew of credit accounts in a short period of time can make you look like a risky customer.

 

Apply for a secured credit card

If you can't get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit.
Screen your card issuer carefully.  Some charge outrageous application or annual fees and punitively high interest rates.
Your credit union, if you have one, is a good place to look for a secured card.
Ideally, the card you pick would:
  • Have no application fee and a low annual fee
  • Convert to a regular, unsecured credit card after 12 to 18 months of on-time payments
  • Be reported to all three credit bureaus.

 

Get a store card

Gas companies and department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions. These cards don't do as much for your credit scores as a bank card (Visa, MasterCard, Discover, etc.), but they're usually easier to get.
Again, don't go overboard. One or two of these cards is enough.

 

 Get an installment loan

To get the best credit scores, you need a mix of different credit types, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages).
Once you've had and used plastic responsibly for a year or so, consider applying for a small installment loan from your credit union or bank. Keeping the duration short -- no more than a year or two -- will help you build credit while limiting the amount of interest you pay.

 

 Use revolving accounts lightly but regularly

For credit scores to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months.
Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a credit card and never use it, the issuer could cancel the account.

 

Just remember these credit tips and you should be well on the path to building a solid credit foundation.

  • Don't charge more than 30% of the card's limit.
  • Don't charge more than you can pay off in a month. You don't have to pay interest on a credit card to get good credit scores. It's much smarter to pay off your credit cards in full each month.
  • Make sure you pay the bill, and all your other bills, on time. 
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