In a perfect world for a consumer, no one would need credit. There would be enough time to earn and save money before needing a car or a house. Credit cards would be used only for cash back rewards and other bonuses, and no one would ever pay interest. There would be no such thing as a credit score or credit report.
Unfortunately, most people need to borrow money when they buy a house. In order to qualify for the best interest rates when borrowing, lenders look for the best credit history. Not only that, but some employers and landlords check your credit history before offering jobs and apartments. In today’s American society, there are few ways to escape the need for credit.
Here are some suggestions for building credit from scratch. If you are younger than 18 years old, you will need an adult to co-sign your agreements, but with the accounts in your name, you will receive the benefit of the credit history.
Open a checking and savings account. Walk into your most convenient local bank and establish a checking account. With this one account, you will be able to open a high-yield online savings account. Having one or more bank accounts is the first stem in establishing yourself as a financially stable individual.
Begin using a credit card. While this is sometimes dangerous advice, using a credit card and paying the balance in full each month for at least six months gives you a head start in your credit history. Look for a credit card without an annual fee.
First-time credit card holders may only qualify for a secured credit card, which means the credit card company holds some of your money in an account. They will use that money if you can’t pay your bill for any reason. Ensure the card you choose reports your credit activity to the three credit card reporting bureaus, Experian, Equifax, and Transunion.
Pay your bills on time. While you probably won’t gain any points by paying electricity and cable bills in your name on time, they can report any delinquent payments to the credit reporting bureaus. This will stand out as a negative item on your credit report and will reduce your credit card score.
Take out a loan. The best credit histories, according to lenders who make decisions about the interest rates they offer, include a mix of credit types. In addition to credit cards, your mix should include an installment loan. Apply for a small loan with a short term from a local bank, perhaps from the same bank that is holding your checking account. Pay each installment payment on time and in full to build your credit history.
Check your credit reports periodically. Get your credit report from AnnualCreditReport.com every four months. You can get an annual credit report three times a year. It sounds crazy, but you can receive one report a year from each of the three credit reporting bureaus through the one website. I have a reminder scheduled for every four months in Google Calendar.
With a country of millions of people looking for credit, lenders want a quick and systematic way to determine how much to charge you for the privilege of borrowing money. At Old Navy, you pay $5 for a tee-shirt, regardless of how well you wear it. But when it comes to debt, you could pay twice as much for the same loan as someone with a better credit history. Making the right decisions early and playing nicely with lenders now can save you tens of thousands of dollars when you shop for a home mortgage or can ensure you aren’t turned away from a job in finance because you’re deemed a credit risk.
Published or updated July 11, 2010.