Building Credit History

Establish good credit history before you find yourself in a situation where you need to rely on it, such as an auto loan or a credit card. If you don’t have any credit history, lenders may see you as a risk because they don’t know if you’re capable of managing credit responsibly. When that happens, you may have trouble finding a lender, and if you do, you may have no choice but to use a lender that charges high interest rates. Good credit doesn’t happen overnight. Here are some ways to get started:

  1. Open a checking/savings account with a financial institution that offers credit cards and maintain the account in good standing for six or more months.
  2. Apply for one of the financial institution’s credit cards. A secured card—one that is backed up by cash collateral—may also be a good option.
  3. Consider taking out a small loan at your financial institution and make timely monthly payments. A secured loan uses a possession (car, motorcycle, boat or house) as collateral, while an unsecured loan is based on your creditworthiness. Paying the full amount on time shows you’re a good credit risk. 
  4. Have a co-signer on a loan if you aren’t able to qualify on your own. Make sure you can repay the loan and that your co-signer understands their responsibilities.

Creating Good Credit

By now, it’s probably clear that credit can be either a friend or foe. Obviously, staying on the friendly side of credit will avoid headache and heartache when you need credit the most. Building positive credit isn’t difficult, but it does require discipline and common sense. Here are five easy ways to build positive credit:

  • Only use credit in a way you can afford. In other words, don’t use credit cards to make purchases you can’t pay off or take out loans you won’t be able to repay.
  • Use only a small amount of your available credit. Staying below 50 percent of your credit limit is wise; below 30 percent is best to build good credit.* Try to pay off your entire balance monthly to make an even stronger statement about your responsibility.

Try to pay off your entire balance monthly to make an even stronger statement about your responsibility.

  • Limit your credit card applications. Too many inquiries into your credit and too many new credit cards can negatively affect your credit score. Plus, the temptation to use credit can be strong, which could make it harder to keep up paying the balances.
  • Make all your payments on time. This may seem like a no-brainer, but if you’ve maxed out your credit, timely payments may become unmanageable. Once a bill becomes delinquent, it hits your credit report, and the damage is done. Bills that have gone into collection can take a long time to erase.
  • Have different types of accounts. Your credit score improves when you have various types of credit accounts, including installment loans (like an auto loan) or credit cards. Be wise about what kind of credit accounts you open.

*Source: Consumer Financial Protection Bureau.

Avoiding Credit Dings

The impact of a ding on your credit score can last between 7 and 10 years; a situation you definitely want to avoid. There are a lot of things that can hurt your credit score, including late or missed payments, having an account in collection, defaulting on a loan and filing for bankruptcy. To prevent negative marks, pay your bills on time and in full, don’t max out your credit and avoid applying for too much credit too quickly.

If you’re struggling to maintain good credit habits, take these three steps to get yourself back on track:

  • Create a budget comparing your income and your expenses. Usually the best way to avoid bad credit is to catch problems early. With a budget, you can see where trouble might be lurking in time to change course and improve your financial situation.
  • Contact creditors directly. Sometimes life deals a crushing blow, like an accident or job loss. If you contact creditors directly and explain the situation, they’ll often work with you to figure out a manageable solution. Don’t be afraid to contact creditors. In these instances, they may be your best resource in avoiding bad credit.
  • Live within your means. Sounds simplistic, right? Overextending yourself can sneak up on you, though. You’ll likely need to make spending priorities and choose among them wisely. You can do everything you set your mind to—just not all at the same time.

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