It’s a common financial predicament for most 20-something-year-olds: You need credit to get credit. But even if you’re older and have been through some credit-wrecking havoc in your life, you could face the same issue.
“The only way to build a credit history is to use credit,” explains Maxine Sweet, vice president of public education at the credit bureau Experian. So here are five easy steps to help get you started.
Know the score: Figure out what credit history you’ve established. Even if you’ve never had a loan or credit card, there’s a good chance you have information on your credit reports that has been compiled by the three major credit bureaus: Equifax, Experian and TransUnion. For instance, Experian now collects rental payment histories, so some landlords submit reports to credit bureaus.
Under federal law, the three credit agencies are required to provide you with a free report every 12 months. JJ Montanaro, a certified financial planner with USAA, suggests taking advantage of your free annual report from AnnualCreditReport.com.
Your credit score isn’t included in your free annual credit report. In most states, the credit bureaus each charge around $10 for your score.
The higher your score, the lower risk you are to lenders and insurers. This means you’ll generally have a better chance of receiving credit along with lower interest rates. Be aware that this all-important number, which ranges from around 300 to around 850, can vary depending on the scoring model used by credit agencies and lenders.
Research your choices: If you have little or no credit history, your choices for loans or credit cards may be limited, Montanaro said. Retail or gas cards, and loans secured by property, such as furniture or a car, may be easier to get. Montanaro also suggests asking someone else with good credit, to cosign on a low-limit credit card with you.
Your bank or credit union may provide another alternative. Sometimes they offer special programs for customers who need to establish credit. “It can be a great way to help build credit history,” Jennifer Adams, executive director of product management at USAA, said.
Establish a track record: Once you have some credit accounts, it’s important to use but not abuse them. “It’s counterintuitive, but if you don’t use credit, you won’t be able to build a solid history,” Montanaro said.
A good habit: Use your card to make small purchases and pay off the balance each month. “By charging a small amount on at least one card and paying the balance on time and, ideally, in full, you’ll show that you can manage credit without charging more than you can afford to pay,” Sweet said.
Use credit wisely: If you want to be a credit superstar, follow two basic rules: Pay on time and don’t go over your credit limits. For those just starting out, this is even more critical.
“It is important to start carefully. At this point, you don’t have a long and distinguished track record that can help alleviate the impact of a small mistake, so tread carefully,” Montanaro says. “Using credit responsibly means you use and pay off your cards monthly, make payments on time every time, don’t apply for numerous accounts and check your report periodically.”
Don’t make these mistakes:
- Applying for several lines of credit and loans within a short period of time can give lenders the impression you’re in desperate need of money and may have trouble paying back the debt. Keep your number of applications at a minimum and only go for the opportunities that offer the best deal.
- Part of your score is based on the amount of credit you have available but aren’t using. The lower your balance (in proportion to the credit limit), the better.
- If you decide you no longer need a particular account, don’t close it. The age of your accounts affects your score, so keep the oldest ones to show as long a credit history as possible.
- Don’t turn a blind eye on those reports. Once you’ve established credit, get in the habit of periodically checking for any fraudulent activity, as well as any reporting mistakes.
Need help reading your credit report?
Credit reports can be so confusing, and to make it worse they are each different. This video will go over a sample Experian credit report and explain the sections, how to read them, and what they mean.