The strength of your credit history is what determines if you qualify for a credit card, a home mortgage or a car loan and at what interest rate. Have you always paid your credit card balance on time? Have you ever defaulted on a loan? It's all part of your credit history.
For new or young borrowers, however, this poses a serious catch-22: How do you qualify for credit without a credit history, and how do you build a credit history without first qualifying for credit?
More than 50 million American adults have no credit history.
They've never applied for a loan, a credit card or any line of credit. While it's possible to pay cash for all expenses, it's hard to build enough cash reserves to pay for important milestones like a college education, car or home.
If you're ready to start building a credit history from scratch, you probably have a lot of questions. Where can a new borrower go for his or her first credit account? What do lenders look for in a loan applicant? What are some credit traps to avoid? Keep reading to learn our 10 healthy ways to build credit.
Check Your Credit Report
In the United States, credit reports are maintained by three major credit reporting agencies: Experian, Equifax and TransUnion. If you've never applied for any form of credit, then you shouldn't have an open file with any of these agencies.
Before you apply for your first credit card or make an appointment with the loan officer at the bank, check with each of the credit reporting agencies to make sure there isn't a false credit report open in your name. More than 20,000 children and teenagers were victims of identity theft in 2008 [source: Noll]. It's possible that someone has already used your name and stolen Social Security number to apply for credit.
If that's the case, you'll need to work with the credit reporting agencies to clear your record, particularly if the identity thief ran up large amounts of unpaid debt in your name.
Credit bureaus will open a legitimate credit file in your name when a bank, credit card company or other lender reports that you've had an active credit account for at least six months. All borrowers, not just first-timers, are encouraged to check their credit reports at least once a year and scan them for errors.
Mistakes can damage your credit score for years -- up to seven years for negative information like late loan payments and 10 years for a serious default like bankruptcy [source: FTC). If you find a mistake, contact the credit reporting agencies immediately.
Open a Bank Account
Although credit reports are the best way for lenders to rate your creditworthiness, there are other ways to build a record of trust. Bank accounts are a great way for a young adult to prove a level of financial responsibility before applying for that first loan.
Checking and savings account information isn't included on a credit report, but lenders will request it for most loan and credit card applications. Lenders like to know that you have a few years of experience handling your own money and making regular withdrawals and deposits. They also like knowing that you have a steady income.
Several major U.S. banks offer free checking accounts with no annual fees or minimum deposits. Remember, though, that negative bank account activity will appear on your credit report: [source: Burt]. So if you keep a low balance and end up bouncing a check, future lenders will hear about it.
Pay Your Bills on Time
Since credit reports only track money that you've borrowed, they don't include information about whether you pay your utility bills and monthly rent on time. Likewise, bill payment histories are not used to calculate the most popular credit score -- the three-digit number known as your FICO score.
What most people don't know is that the FICO score isn't the only credit score available to potential borrowers. Some alternative credit scoring models incorporate bill payment histories as one of the main criteria for creditworthiness.
The people behind FICO -- the Fair Isaac Credit Services -- recently introduced the FICO Expansion Score, which culls financial data from "alternative data sources" like rent payments and utility checks to determine creditworthiness [source: Fair Isaac Credit Services].
There's even a company called Payment Reporting Builds Credit (PRBC) that allows you to self-report payments like rent, rent-to-own purchases and utilities. PRBC might not yet have the clout of the big three credit bureaus, but a solid report from PRBC might be enough to get your foot in the door with a lender.
Of course, to earn a good grade from PRBC, you'll have to pay your bills on time religiously. Get into the habit of paying a bill as soon as it shows up in the mail, or consider setting up online accounts to pay all of your bills electronically [source: Burt].
Save And Share :
