How to Build Credit
If you want to get credit cards or loans for major purchases such as buying a house or a car, you need a good credit rating, but more importantly, you need a credit history. You must build credit before you can qualify for major credit cards and unsecured loans, and you also need a proven track record of successful borrowing and pay-back before lenders will take a chance on you with large loans such as mortgages and automotive financing. You can get certain accounts without a credit history and use them to add positive information to your Equifax, TransUnion and Experian credit reports. Your ability to borrow expands as you gradually build a good credit rating.
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Instructions
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Open a bank account. You can open a checking account, a savings account or both, but manage your finances responsibly if you open a checking account. A bank account shows stability, but you could end up with a collection agency entry on your credit reports if you bounce checks and businesses turn you over to debt collectors. Your accounts themselves do not show up on your credit reports, but Bankrate columnist Steve Bucci notes that lenders ask about them on credit applications.
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Apply for a secured credit card or open an account with a co-signer. These methods enable you to build up some revolving account history when you cannot qualify for a credit card on your own. The secured card requires a cash deposit in a bank account equal to your credit limit, which can be as low as a few hundred dollars. A credit card account with a co-signer requires you to team up with someone who already has excellent credit. You share equal responsibility for the bill, so you ruin the other person's credit as well as your own if you do not make on-time payments.
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Apply for a branded gasoline credit card or a store account. You may qualify for those cards even if you cannot get an unsecured major credit card because retailers often have lower acceptance criteria, according to Bankrate writer Leslie McFadden. Retail and gas cards generate credit report entries just like Visa, MasterCard and other major brands.
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Charge some purchases every month, but keep your owed balance below 30 percent of your credit lines, MSN Money writer Liz Pulliam Weston advises, with 10 percent being ideal. You build credit by generating positive activity on your TransUnion, Equifax and Experian credit reports, but high balances hurt you even if you make on-time payments. Charge only as much as you can afford to pay off completely within a month or two.
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Tips & Warnings
The AnnualCreditReport.com website lets you monitor your credit-building success by giving you free copies of your credit report from all three credit bureaus once every 12 months, the Federal Trade Commission advises. The bureaus must give you the reports without obligation under the Fair Credit Reporting Act, as long as you order them from the proper website. Your reports should list all your accounts, balances and payment history.
References
- Bankrate.com; How to Build Credit for the First Time; Steve Bucci; November 2002
- Bankrate.com; Secured Credit Cards, What to Know; Michael Estrin; May 2011
- Federal Trade Commission; Facts for Consumers, Building a Better Credit Report; March 2008
- StudentPlatinum.com: Being a Co-Signer
- Bankrate.com; Best Ways to Establish Credit; Leslie McFadden; February 2010
- MSN Money; Raise Your Credit Score to 740; Liz Pulliam Weston; September 2010
Resources
- Photo Credit Comstock/Comstock/Getty Images
