Five Easy Ways to Build Your Credit History
The act of opening up a credit card is the tried and true way to establish credit history. It's simple: You use the card regularly, pay the bill on time, and you're on your way to an excellent score. This history is also important if you want to borrow money for a major purchase such as a car or house. Money lenders, such as banks, find out your credit history in the form of a credit score, a number between 300 and 850 that represents the likelihood you will pay your bills on time, according to Equifax, one of the three credit reporting bureaus (the others are Experian and TransUnion). The higher the number, the better your credit score. But what if you have a limited credit history or none at all? Here's how to build yours easily.
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Go slow and steady, and show stability.
First, it's important to recognize that establishing good credit doesn't happen overnight. "From no credit history to a credit score above 700 with the three trade bureaus will take a person 12 months with perfect management of the tradeline," says Amy VanGelder, lead mortgage consultant at Price Financial in Wayne, Pennsylvania. "This means keeping the balance owed below 30 percent of the high credit limit and making on-time payments."
Stability extends to other aspects of your life: For instance, jumping from job to job in a short period of time is a red flag to many lenders. It looks better on your credit application if you've had a stable income and home address, too.
Pay your bills on time.
If you buy something using a credit card, expect to pay for it by the card's due date. If you pay late, a past due payment will appear on your credit report and may stay there for up to seven years, according to Equifax. To avoid missing a payment, set up your credit cards to be paid automatically from your checking account each month. "Payments made on time, and either paying the card off in full every month or keeping the balance due below 25 to 30 percent of the high balance available brings the strongest scores," says VanGelder.
Become an authorized user on someone else's card.
Do you have a family member or close friend who would agree to add you as an authorized user on their account? It would help you gain a credit history from the credit usage of another person. But here's the thing: The account holder, says VanGelder, "should be someone you believe will manage the account and keep the account in good standing." If you have any doubts, think about asking someone else.
Look into a secured credit card.
A credit-card company may let you open this type of account because there's no risk to them if you miss a payment. The bank offering the credit card requires the borrower to secure the account with a savings account that is equal to the limit of the card, as VanGelder explains. "For example, a secured credit card with a high balance of $500 would have a savings account attached to it with $500 from the borrower," she adds. "If the borrower doesn't pay the debt charged on the credit card on time, the bank has the funds to pay the debt and closes the card."
Apply for a gas or retail store credit card.
These cards tend to be easier to get and have lower credit limits than standard cards but some come with high interest rates. Plan on charging only a small amount and paying it off in full each month.
