Build your Credit from Scratch

Think of your credit like your financial resume. And whether you’re applying for a new house, car or just a new cell phone plan, experience is the most important thing.

While that simple fact puts a lot of pressure on your financial past, the good news is that if you’re starting from scratch, building credit doesn’t have to be complicated. And improving your credit doesn’t have to be a headache either. Take some simple steps now so that a globe-trotting vacation or low insurance rate becomes more than just a pipe dream.

1. Get a credit card

I know what you’re thinking. I want a good credit card, but that’s impossible with no credit. Actually, banks and credit unions have options just for you.

Secured credit cards require a cash deposit as collateral, but are great options for credit newbies. Try to find one that reports to all three credit agencies and that doesn’t charge an annual fee.

A cosigner on a credit card can increase your chances of qualifying for one. Talk to your family members and see if someone will back you. Keep in mind that person will be responsible for paying the balance if you don’t.

Become an authorized user on someone else’s credit card. As with a cosigner, he or she will be responsible for the balance, but there is less pressure on you to open up your own card.

2. Take out a loan.

Again, I know what you’re thinking. I’m one step ahead of you.

Credit builder loans from credit unions are designed for people wanting to build their credit. The money lent to you is placed into an account where you can’t touch it until you’ve paid it back. Traditional loans give you the money up front, but with credit builder loans, they give you the money at the end of the loan term.

Student loans do have one benefit aside from facilitating our higher education: they build our credit. And with over 44 million Americans dealing with student debt, it’s good to know an added bonus exists.

Car loans are another great alternative if you make those timely car payments every month. Granted, paying in cash will save you on interest, but it won’t build your credit.

3. Pay your rent and utilities on time.

Services like RentTrack and PayYourRent report your timely rent payments to the three credit agencies to help you build your credit. (In some cases, landlords will report this information, but if they don’t, these services are available.)

Also ask your utility companies if they can report your payments, too.

What else should I know?

• Any account needs to stay open for at least six months in order for you to have a credit score.

• Don’t confuse a credit score with a credit report. A credit report is a list of your financial history that is used to determine your credit score.

Your credit is important! Even if you don’t have any current plans to buy a house or a car, you won’t be able to make up for lost time as quickly as you may like. A few easy steps now will make a difference in the future.

Improve Your Credit Score

True or false: Your income influences your credit score.

I know what some of you are thinking. A lender looks at your income to see how much you can borrow, but that’s another story. What about that three-digit score?

False. Your income doesn’t influence your credit score.

If you answered differently, you’re not alone. In fact, many Americans don’t quite understand what factors determine their credit score and how to improve it.

What most of us do know is that a high credit score helps us get lower interest rates, avoid deposits on utilities and cell phones, and obtain faster approval on new loans and rentals. All of us can understand those benefits, so let’s explore how to enjoy them, shall we?

Important Steps to Raise Your Credit Score

1.  Reduce Credit Card Debt
Do you have a high credit limit? That’s great, but not as great if your credit card balance is also high. Combine all your credit card balances and compare them to your combined credit limit. It should be at 30% or less.

Are your balances high right now? That’s okay! Work on getting them down and your credit score can quickly reflect those efforts.

2.  Pay Bills on Time

This is a big factor. We’re not just talking about your credit card payments, but all your bills. While not all of them are reflected on your credit report, they will be if they’re not paid on time. That department store card that you only use at Christmas? The fine from your local library? Don’t let those seemingly insignificant charges get the best of you. All it takes is one late payment to drop your score.

3.  Keep Old Credit Cards Open
You don’t use that credit card anymore, so you may think it’s best to close it. Think again! If you close a credit card, over time it will be removed from your credit report, which will reduce your credit age. (Being old in credit years is a good thing!) Lenders want to see experience with managing credit, and the older your credit age is, the more experienced you are.

Also keep in mind that if you close a credit card, you’ll reduce your available credit. Remember that 30% figure I gave in tip #1? If you close a credit card with a credit of $3,000, you’re reducing your credit limit by $3,000. Keep it open and you’ll have more wiggle room with your credit card balances.

This same principle applies to old debt. Think about that car or house you finally paid off. Just because you paid it off doesn’t mean you want it off your credit report.

4.  Keep those Credit Inquiries to a Minimum
This doesn’t mean your checking your credit will hurt your score. That’s considered a “soft inquiry.” A “hard inquiry” is made by a potential lender because you’re applying for credit. A couple of them won’t hurt you, but more than that in a short period of time could cost you points.

The good news? Inquiries are erased from your credit report after 24 months.

5.  Keep an Eye on your Credit Report

I could probably write a whole other blog about identity theft, but most of us know how rampant it is. What’s even scarier is that you may be a victim and not even know it. And what’s worse, you may not even experience the consequences until years later when a collections agency starts calling you for something you know you never opened.

So how do I check my credit?

You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228. You’re also entitled to see your credit report within 60 days of being denied credit, or if you’re on welfare, unemployed, or your report is inaccurate. It’s smart to request a credit report from each of the three credit reporting agencies and to review them carefully, as each one may contain inconsistent information or inaccuracies. If you spot an error, request a dispute form from the agency within 30 days of receiving your report.

If you have a credit card, you most likely have access to your credit score for free.

Even if you’re not looking to open a line of credit right now, you can take steps to ensure you’re set for when that day comes. At the very least, protect yourself against identity theft by staying up to date. It’s free and relatively easy and the truth is, you can’t afford not to do it.