Having a credit history is extremely important. When you want to make a large purchase, often times it will take getting a loan from somewhere in order to make the purchase that you desire. From borrowing money to buy a car, to getting a store credit account to purchase furniture, or even getting a mortgage to purchase your first home, your credit score is going to come into play.
One of the problems many people run into is that they currently do not have any credit. When you do not have any credit it can be almost as bad as having a poor credit history. It can be difficult to qualify for a credit card, loan, or even a rental property if you do not have a credit history.
The question becomes, how are you supposed to build up your credit if you cannot get anyone to give you credit in the first place?
When you do not have any type of credit, it can seem like a lot of work trying to get up to a good score. This is one of the most difficult thing about credit scores. While it takes no real time at all for your score to go down, it can take a really long time to build your score back up.
When you get your first type of credit, perhaps an authorized user status or a student loan, you will begin building your credit history. However, you will not instantly be given a credit score. This is why it can be tough to qualify for a good credit card.
There are two prominent credit scores that are used by the majority of lenders. These are the FICO credit score, which is the most popular, and the VantageScore, which is gaining in popularity.
In order to get a FICO score you will need to have at least one account that you have had open for a minimum of six months. You will also need to have at least one creditor that reports your payment activity to a credit reporting agency within the past six months.
It is possible to generate a score more quickly through VantageScore, which is FICO’s largest competitor. The problem is that most creditors look at a FICO score, so generating a Vantage Score can be useful, but it may not be very helpful overall.
While building credit may seem almost impossible, there are several tools that can be used in order to help you establish a credit history so that you can qualify for the loans that you need and that you want.
Some of these tools include credit builder loans, secured credit cards, co-signed loans, co-signed credit cards, or having authorized user status on someone else’s credit card.
Whether you choose one or more of these options, make sure that you use these tools in a way that will lead to you obtaining a good credit score.
If you are trying to establish a credit score from the beginning, you are going to likely have to start out with a secured credit card. Secured credit card are backed by a cash deposit that you make into an account. The amount of the deposit is typically the same amount as the credit you will be allotted.
A secured credit card can be used just like any other type of debit card. You will make purchases and then make a payment on the due date or before. The card will incur interest if your balance is not paid in full. If you fail to make a payment your cash deposit will be used as collateral.
A secured credit card is not meant to be used forever. The main purpose of this type of card is to help you build enough credit up in order to be eligible for an unsecured credit card. Unsecured credit cards do not require a deposit to be made and come with many other benefits.
When choosing your unsecured credit card you should try to find one that has a low annual fee. In addition, it is important to make sure that the secured card reports to all 3 of the credit bureaus, TransUnion, Equifax, and Experian.
When you close your secured credit card account you will receive the deposit that you made back.
Credit builder loans are exactly what they sound like. These loans are designed with the specific purpose of helping people build their credit.
Typically, with this type of loan the money that you borrowed will be placed into an account that is held by the lender. The money that you borrow will be held until you pay off the loan amount. Essentially, a credit builder loan is a forced savings account. You are paying into the account for money that you want to borrow.
When you pay off the loan the money will be released to you. All of the payments that you make will be reported to each of the three credit bureaus.
These loans are typically offered by community banks or credit unions. There is at least one bank that offers a credit builder loan online.
Another way to obtain unsecured loans or credit cards is by using a co-signer. While obtaining a co-signer might sound like a good thing to do, it is important to note that anyone that chooses to cosign a loan or credit card with you will be responsible for any debt that you accrue and do not pay.
Instead of co-signing a loan with you one of your friends or family members may be willing to add you as an authorized user on their credit card. One of the nice things about being an authorized user is that you will get to have access to a credit card, be able to build up your credit history, and you will not be obligated to pay for the charges that you make.
With that being said it is important to discuss the terms that your friend or family agrees to when they add you to their card.
When discussing the terms of being added as an authorized user, make sure that you discuss whether or not the card company will report authorized user activity to any of the credit bureaus. This activity is typically reported, but you want to make sure because if they are not it will not help you build your credit history.
If your parents have already established a good credit score, you can use this to your advantage if they are willing to add you to their credit card as an authorized user.
If you are currently paying rent for an apartment or home, it is important to note that not all credit scores take these payments into account and often times paying your rent on time is not reported to any of the credit bureaus.
There are several rent reporting services such as RentTrack and Rental Kharma that will take one of the bills that you already pay and put it on your credit report. This can help build a positive credit history as long as you are making your payments on time. This can help you build up your credit history enough to possibly get a credit card or loan that can firmly establish your credit history for all types of lenders.
Perhaps the most important thing to remember when trying to build credit is that it is going to take some patience and time. Typically, it will take a minimum of six months of paying all of your bills on time in order to establish a good credit ranking.
One of the ways to make sure that you stay on track of building your credit is to practice good credit habits in order to show lenders that you are in fact creditworthy. Some of the ways that you can do this include:
Building your credit will take some time. Once you have established a credit report, the next thing you need to do in order to maintain a high credit score is to make sure that you periodically check your credit report. The credit report is basically like a report card of how you have used any credit throughout your past.
You are entitled to one free credit report each year from each of the three main credit reporting bureaus. You can access these reports at annualcreditreport.com.
Obtaining a free credit score is a bit trickier. However, there are more and more credit card companies that are printing a consumer’s score on their statements each month. Some companies are even offering credit scores to those who are not their customers. However, most of the time you will need to pay a fee in order to obtain your actual credit score.
Overall, the most important thing to remember when considering building your credit is that it is going to take time. You are going to need to be patient and work with what you are offered.
It is important also to learn what counts toward your score. If you get a new credit card you need to make sure that you learn how credit scores are calculated so that you do not make a juvenile mistake such as missing one of your payments or maxing out your spending limit.
Another thing to consider when you are just starting out is that age does matter when it comes to your credit history. According to a report conducted by SubscriberWise in 2011, of the 0.2 percent of people who have a credit score of 850, most were over the age of 60. On average, these people had a credit history that was over 30 years old on average.
If you are just starting out you are not going to have a score above 800. It is simply not possible. Instead of becoming frustrated by this, make building your credit history one of your long term financial goals. Keep accounts open, even ones that you do not use often, so that lenders can see that you have good borrowing behavior over the course of time.
Remember, getting started early with good borrowing history can be very important for your financial future. A good credit history is going to stay on your credit report forever. If you make sure that you make all of your payments on time and keep your accounts open, you are well on your way to improving your credit history and qualifying for better lending options.