It could be the greatest contradiction of all time: You have no credit, but to build credit, you need a credit history. The 3 credit bureaus — Equifax, Experian
So how do you become visible? We’ll show you how.
Main Takeaways: How to Start Building Credit
- Credit scores range from 300 to 850. Your score is a representation of how well you pay your debts back. If you ever need to get a loan in the future, for a house, car or other purchase, a good credit score will help you get favorable terms from a lender.
- There are many terms that comprise your credit score. These include payment history, credit utilization and more.
- If you’re ready to start building credit, read on to explore 5 things you can do right now.
Why Your Credit Matters
Your credit score is a simple numerical calculation that determines your creditworthiness, or rather, how risky it would be to loan you money. Look at it from a lender’s perspective. If you ask to be given a loan but have no evidence from the past that you’d be able to pay it off — would you lend to you?
It might not bother you at all for a while that you have no credit — until you want to buy a home or a car. In other words, your credit matters because your future needs may depend on it. Be sure that a bank will want to loan you money and whether a lender can trust you to pay it back.
What Is My Credit Score?
Credit reports are maintained by the three major credit reporting bureaus: Experian, TransUnion and Equifax.
These companies receive information about your loans and repayment history and provide these reports to companies looking to extend you credit, offer you employment, rent you a home or complete a background investigation.
Lenders or anyone else that pulls your credit report look to see if you are responsible, trustworthy and whether you pay the debts you owe.
A credit score, also known as a FICO score, is a numerical representation of how well you pay back any debts you owe. FICO is the score used by most lenders, though VantageScore is a close second. The score is created using a proprietary calculation which weighs the information on your credit report.
The score takes into account your payment history, how much you owe compared to how much available credit you have, your length of credit history, what types of credit you have and when you last opened a line of credit.
Credit scores range from 300 to 850 and most Americans fall into the 600 to 750 range. Most lenders have numerical guidelines for their rates and offer interest rates and terms based on your score. A score above 670 is generally considered to be a good credit score and higher scores are eligible for more favorable loan terms and rates.
How to Start Building Credit
There are a number of ways you can start building credit to get to that all-important good score.
Get a Secured Credit Card
Secured credit cards are a great first credit card offered by your bank that gives you a line of credit linked to an amount you have in a savings account, usually $200 or $300. Make a few small purchases, like gas or groceries, then pay them off every month.
Alternatively, you can open a store credit card or gas card since they are relatively easy to obtain, but be sure that you pay them off monthly since their interest rates may be higher.
Don’t buy things just for the credit history because you could end up in debt. Some financial institutions may also offer small credit-building loans or personal loans, which allow you to make payments on a small loan over 6 to 24 months that accrue value in a savings account and report your payments to credit bureaus.
Take Out a Loan
A student loan is a great place to start for credit building and is often one of the first ways that people start building credit. An auto loan is another great place to begin building your credit, as long as you make on-time payments and it’s a justifiable purchase to begin with (in other words, don’t just buy a car because you need to build credit).
Become an Authorized User on a Credit Card
Becoming an authorized user on your parents’ or another adult’s credit card means that you’re essentially piggybacking on someone else’s credit card. However, the other individual(s) will be the ones responsible for repaying the money you spend if you don’t hold up your end of the bargain and pay what you owe.
If you all start missing payments or accrue debt, it could hurt your credit score — and theirs.
Get a Co-Signer on a Credit Card
Your parents, a close friend or family member may agree to co-sign a credit card or other loan for you, which could increase the chances that you’ll get approved for the loan you want and help you build your credit. Again, if you miss payments or rack up debt, their credit score (and yours) will be affected.
Make On-Time Rent Payments
Your landlord may report to the credit bureaus. If not, ask him or her to use sites like RentTrack and PayYourRent, which offer same-day rent payment processing and credit-building features. Your utility companies might also report to the credit bureaus, so call and find out if they do.
What Makes Up Your Credit Score
Your payment history is the largest component of your score and looks at your ability to pay on time every month.
Even if you cannot pay off your credit card in full each month, making on-time payments of even the minimum amount owed ticks the box for building a steady payment history. If you forget to pay or have a financial emergency and cannot pay your minimum payment that month, contact your card issuer and see if it’ll waive the late fee as long as you pay as soon as you can.
One late payment will not cripple your credit score, but a history of late payments will cause your score to plummet.
Using credit will increase your credit utilization, which refers to the amount of debt you have compared to your available credit. Ideally, you should use less than 30% of your available credit to have the best ratio and the highest score.
Even if you have one card maxed out and others that are not, that maxed-out card drags down your score, so keep that in mind when you start building credit.
Length of Credit History
There’s no time like the present to start making history by opening a credit account. Don’t close old credit accounts when you want to boost your credit score, even if you don’t use them anymore. Those old accounts actually boost your score by extending your length of credit history and your score will drop when you close them.
Types of Credit Used
Multiple types of credit are the most favorable mix for boosting your score. Secured credit (a loan tied to an asset) like a mortgage or car loan is weighed more favorably than revolving unsecured credit (credit cards are a good example) when calculating your credit score.
Of course, you should not go out and get a car loan just because you think it would boost your credit, but opening multiple credit cards just for the sake of credit is not a wise choice.
A better choice might be to take out an installment loan with your bank for a large purchase or vacation rather than to put it on your credit card, which allows you to have a second type of credit line on your report and shows your history of on-time payments. Plus, you are likely to get a lower rate on your installment loan than your credit card.
Opening a new credit line will benefit you if you have zero credit, but new credit inquiries and accounts can ding your score a bit and shorten your average length of credit. They could also boost your score a bit by increasing your available credit.
Start Building New Credit Now
It takes consistency and discipline to build credit, but the tools you use to track and build your credit matter just as much. There is no quick fix for a damaged credit score and repairing or building a score takes time, usually many months or a year to make a big difference.
Taking the steps to build credit and improve your score will pay dividends by improving your chances of getting a loan at a favorable rate and will even benefit you when you apply for a job or rent an apartment.