Establishing a good credit history has never been as important as it is today.
It’s not just that you’ll need good credit to get decent rates when you’re ready to buy a home or a car. Your credit history can determine whether you get a good job, a decent apartment, a deal on your cell phone and reasonable rates on insurance. One seemingly minor misstep — a late payment, maxing out your credit cards — can haunt you for years.
If you’re just starting out, you have an once-in-a-lifetime opportunity to build a credit history the right way. Here’s what to do and what to avoid.
Check your credit report:
You’ll first want to see what, if anything, lenders are saying about you. That kind of information is contained in your credit report at each of the three major bureaus: Equifax, Experian and Trans Union. You’re entitled to a free annual look at your reports from AnnualCreditReport. Please go to www.mcmf.net and click on the Order My Credit Report Here tab to be directed to your free credit report.
Credit reports are used to create your credit scores, the three-digit numbers that lenders typically use to gauge your creditworthiness. Lenders also may look at the reports themselves, as may the landlords, employers, insurers and utility companies who use credit to evaluate applicants.
Can you have a credit report if you’ve never had credit? Maybe.
Somebody else’s information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open bogus accounts.
If that’s happened to you, you’ll need to clean up your credit report before trying to apply for new accounts. Use this sample dispute letter with instructions and contact information for all 3 bureaus. http://www.mcmf.net/MCMF_EXCEL_FILES/Sample%20Dispute%20Letter.pdf
Establish checking and savings accounts
Here’s a basic step that’s sometimes overlooked by people seeking credit. Lenders see bank accounts as signs of stability.
Opening checking and savings accounts is also one of the few things you can do as a minor to start building a financial history. While you can’t get a credit card in your own name until you’re 18 and can be legally held to a contract, many banks have no problem letting you open an account. Many banks offer low cost or no cost student checking accounts. Check into one of these options, and remember to not overdraft your account. A single overdraft on a 3.50 latte could cost you over 35.00! Balance your checkbook often, and sign up for online banking an easy way to access the activity on your account 24 hours a day.
Understand the basics of credit scoring
You need to know that the two most important factors in your scores are:
- Whether you pay your bills on time—this make up 35% of your credit score
- How much of your available credit you actually use—this makes up 30% of your credit score
It’s essential that you pay all your bills on time, all the time. Set up automatic payments or reminder systems so that you’re never, ever late. All it takes is a single missed payment to trash your credit scores — and it can take up to seven years for the effects to completely disappear.
You also don’t want to max out any of your credit cards, or even get close. Keeping your credit use to less than 30% of your credit limits (10% is better) will help you get the best possible credit scores — and should help keep you from getting over your head in debt, as well.
Finally, you don’t need to carry a balance on a credit card to have good credit scores. Paying your bill in full each month is the best way to keep your finances in shape and build your credit at the same time.
For additional resources on credit scoring education, please check out www.mcmf.net
Become an Authorized User
The fastest way to establish a credit history can be to “borrow” another’s record, either by being added to a credit card as a joint account holder or by getting someone to co-sign a loan for you.
Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit scores.
If you default, however, you won’t be the only one who suffers. The co-signer has basically promised to make good on this account, so any delinquencies will show up on her credit report as well.
Being added as a joint account holder also has its risks, for you as well as the person giving you access to the card.
If your father adds you to his credit card, for example, his history with that account can be imported to your credit bureau file, giving you an instant credit record. If he has handled the account well, that reflects well on you. But if he hasn’t, his mistakes would also become yours. You become responsible for any debt on the card, and it’s difficult to get your name removed. Any late payments or other problems could make it harder for you to get future credit than if you’d established your history without help.
Piggybacking on someone else’s credit has been highly misused, and therefore FICO now looks at these accounts with a much keener eye. Only be an authorized user on a parent or guardian’s account, or if you are married, a spouses. Otherwise that account information may not be reflected in your credit score.
Apply for credit while you’re a college student
In 2010 the Credit Card ACT limited the credit card offers to young adults. Now if you are less than 21 you must prove you can repay the debt, and credit card companies can no longer set up booths on campus offering free pizza, t-shirts even Ipods to students who apply for credit.
That being said, lenders are still willing to take risks with you that they won’t once you graduate, probably because they know that your parents’ will more than likely cover the debt. You still have to exercise some caution, though. Look for a card with a low or nonexistent annual fee and low interest rates. For now, just get one: Opening a slew of credit accounts in a short period of time can make you look like a risky customer. Later, you’ll want more than one card.
Apply for a secured credit card
If you can’t get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit.
Screen your card issuer carefully. To be frank, there are a lot of bad guys in this particular niche of the credit world. Some charge outrageous application or annual fees and punitively high interest rates.
Your credit union, if you have one, is a good place to look for a secured card. Ideally, the card you pick would:
- Have no application fee and a low annual fee
- Convert to a regular, unsecured credit card after 12 to 18 months of on-time payments
- Report to all three credit bureaus.
If the issuer doesn’t report to the credit bureaus, the card won’t help build your credit history.
Get a store card
Gas companies and department stores that issue charge cards typically use finance companies, rather than major banks, to handle the transactions and they’re usually easier to get approved.
Again, don’t go overboard. One or two of these cards is enough. A gas card is a great one to start out with.
Get an installment loan
To get the best credit scores, you need a “healthy mi”x of different credit types, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages).
Once you’ve had and used plastic responsibly for a year or so, consider applying for a small installment loan from your credit union or bank. Keeping the duration short — no more than a year or two — will help you build credit while limiting the amount of interest you pay.
Use revolving accounts lightly but regularly
For credit scores to be generated, you have to have had credit for at least six months, with at least one of your accounts updated in the past six months.
Using your cards regularly should ensure that your report is updated regularly. It also will keep the lender interested in you as a customer. If you get a credit card and never use it, the issuer could cancel the account.
- Don’t charge more than you can pay off in a month. You don’t have to pay interest on a credit card to get good credit scores. It’s much smarter to pay off your credit cards in full each month.
- Make sure you pay the bill, and all your other bills, on time.
Check your Credit Report, again
Now that you have worked diligently to build credit, you want to check your credit report to make sure all of your activity is being reported accurately. Again, if you find any information that is not accurate, file a dispute as mentioned earlier.