3/6/2013 3:30 PM ET|
How to build credit from scratch
Whether you're building or rebuilding, the steps you take to construct solid scores are the same. Here are 6 steps to establish good credit.
Whether you are just starting out or starting over, figuring out how to build credit can be confusing. Don't let it overwhelm you. There are some simple steps you can take right now to establish credit. Before you know it, lenders will be chasing you with offers.
No. 1: Check your credit. If you haven't established credit, this advice may sound pointless. Unfortunately, though, children are sometimes the prime target of identity theft and some young adults who apply for credit for the first time discover their information has already been used by someone else to get credit. Request your credit report at AnnualCreditReport.com to make sure you don't already have a credit history.
No. 2: Get your first credit reference. Your first credit reference will establish your credit history but it can "take credit to get credit." That's why a secured credit card is often a popular way to get started. With a secured card, you'll place a security deposit with the financial institution and, in turn, get a card with a credit limit that is usually equal to the deposit. Choose a card that reports payments to the major credit reporting agencies (Equifax, Experian and TransUnion) and you'll be able to establish credit with all three of them. Other ways to build credit include getting a car loan, retail credit card or student loan.
No. 3: Use it but don't abuse it. Use your new secured card to purchase things you'd buy anyway -- gas or groceries, for example -- but don't charge it up to the limit. Ideally, you want to use about 10% to 20% of your available credit in order to maintain a positive "debt-to-available-credit ratio." That means that if you have a card with a $300 credit limit, you'll want to charge only about $30 to $50 a month on the card. It may not sound like much, but even that small activity will help you establish credit.
No. 4: Pay your bills on time each month. Your payment history counts for about a third of your credit history, so make sure you keep it squeaky clean. One late payment can mean a big drop in your credit scores. Set up online alerts or mark your calendar so you don't let a due date slip by.
No. 5: Round out your references. The best credit scores go to those with a well-rounded credit history that includes several different types of loans -- all paid on time, of course. So once you've had that first credit card or loan for at least six months, consider getting another loan of a different type. If your only credit reference is a credit card, for example, you may want to get a personal loan or auto loan. If you have only a student loan, then it would be a good idea to get a credit card.
No. 6: Monitor your credit and scores. Once you understand how to build credit, you have to maintain it. If you've put in the effort to build good credit scores, the last thing you want is to let a mistake ruin all that hard work. So get your free credit reports each year at AnnualCreditReport.com, and check your credit scores monthly through Credit.com's free Credit Report Card. Look for unusual activity or changes that can indicate a problem. Hopefully, all you'll see is progress toward establishing great credit!
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Credit Score is just a number, yet we work hard to make sure that it is hi.
We never stop to think that they created the credit score to get us to spend money, you cant have a credit score if you pay cash, dont get loans and yet it will not let you get a loan becuase your credit histry is short.
You spend money that is not yours and pay interest, than your credit score will improve. you dont get into debt and your credit score will be low. does any one alse besideds me see this as a problem
My #1 complaint about the whole credit score thing...YOU HAVE TO PAY FOR A CREDIT SCORE!! You have to let these finance companies hit you with finance charges and pay them for them to say you are a credit worthy individual. One of the big mistakes I made while I was young was paying cash for everything...even though I had a 20% down pmt (plus another 20% in cash reserves), triple the income required. I was told I did not have enough credit when trying to buy a house...so I had to go out and buy some stuff and let them hit me with finance charges before I was "Credit Worthy". When I was securitizing MBS securities years ago the #1 determinant these investors considered was credit score...(Even over income, hell they even threw income out the window with the Sub Prime crap)...boy that sure was a mistake.
Thinking of things worse than the credit bureaus, I can only come up with three (No, make it four)...
Murderers, Rapists, Child Molesters and Politicians
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