Purpose of this article: to give you some tips to start building your credit history and explain why building up credit history is important to your financial well-being.

Overview

Credit is one of those tricky things … you need to have a solid credit history to get a decent credit card or a loan, but it’s hard to start building history when no one will give you credit in the first place. So what options do you have to establish credit history without credit in the first place? The following article will walk you through some solid options for building your credit history from scratch.

Option 1: Apply for credit card even with limited/no history

The best credit cards with the best interest rates are usually reserved for people with extended years of good credit history. If you are just starting out though, there are still a couple of credit card options for you even with limited or no credit history:

• Apply for a store credit card

Oftentimes stores extend credit cards to their customers with little to no credit history. These cards typically have very low credit limits and high interest rates, but they do give you a chance to prove that you can handle your finances in a responsible fashion. Once of my favorite store credit cards is the Target REDcard because it gives you 5% off every purchase every time and gives you free online shipping.

• Apply for an unsecured credit card (traditional credit card)

Traditional unsecured credit cards are not off the table when you have limited credit history. It just usually means that your credit card will have lower limits, more fees, and a higher interest rate associated with it. Credit card companies like to be compensated for taking on risk, and cardholders with limited to no histories bear the brunt of this. Credit Karma has a good list of unsecured credit cards for 2018.

• Apply for a secured credit card

If you are unsuccessful in opening a store credit card or a traditional unsecured credit card, your last credit card option is a secured credit card. With a secured credit card, you make a cash deposit upfront, say $300. This cash deposit serves as collateral against the credit card. You then charge the card accordingly and pay the card off each month. If you don’t make payments in full, you incur interest. The cash deposit is returned to you when you close the credit card. The key with secured credit cards is their duration of use should be short and only long enough to give you enough credit history to qualify for a better unsecured credit card. NerdWallet has a list of the best secured credit cards for 2018.

Option 2: Get a Co-signer or become an Authorized User

You have heard the adage that sharing is caring and with the co-signer or authorized user strategy, this adage really rings true. This is because when someone agrees to be your co-signer or allows you to be an authorized user on their credit card, they are ultimately committing to repaying your debts should you be unable to.

When someone agrees to be a co-signer to your loan they ultimately agree to pay off the loan if you cannot make the payments. When someone allows you to be an authorized user on their credit card they allow you to use their credit card and build history. But ultimately, they are legally obligated to pay for any charges unpaid.

Both situations require a huge degree of trust and should not be entertained lightly.

Option 3: Use your monthly rent to build credit history

Assuming you do not have a monthly mortgage payment (since you are just starting to build your credit history), you can use your on-time monthly rent payment to your landlord to build credit history.

Some landlords report positive payment history to the credit reporting agencies, and even if your landlord doesn’t, you can use a variety of rent-reporting services to get your positive payment history reported.

The only downfall of the rent-reporting services is that they aren’t free. I guess there is no such thing as a free lunch.

Option 4: Use your monthly student-loan payment to build credit history

The average student loan debt hover around $37,172 per person. If you happen to be one of the many citizens burdened with student loans, you can at least use your monthly on-time payments to build some positive credit history. This is because student loans are considered installment loans that are paid back over a set period of time.

So, paying back your student loans on time will positively impact your credit history, and just staying on top of your loans each month is enough to boost your credit score into the 700+ range over time.

Closing

Your credit history good or bad can impact your ability to buy a home, purchase a car, get a better credit card, get cellphone coverage, and even impact the type of employment opportunities you may have.

Building and maintaining positive credit history takes some time. Remember that your credit history is really just a story that tells future lenders how you manage your financial affairs. If you are just starting out on your credit journey, you can use the strategies discussed above to navigate this process.

My hope in writing this article is that after reading this, you will take some steps towards successfully building your credit history.

 

Purpose of this article: to explain what goes into your credit score and give you tips to improve your overall credit score.

Overview

Your credit score is a number that approximates how likely you are to repay your debt. This number is used by lenders to decide whether or not to approve you for new loans. And while your overall credit history is captured and maintained by the three main credit bureaus (Equifax, Experian, and TransUnion), the actual score is calculated by the VantageScore and FICO models.

Credit scores range from 300-850 and your score within this range is based on many factors such as how often you make payments on time, and how many accounts you have in “good-standing.”

It is possible at any given time to have different scores given the various scoring models that are in place, but the bottom line is that your score is based on the information within your credit report. It’s a good habit to review this information annually to ensure that it is correct. You can access your free annual credit reports from here.

The Main Factors that Affect Your Score

The factors that are generally considered when calculating your credit score are as follows:

• Payment history – do you pay your bills on time every time?

• Length of credit – how long have you had your accounts open?

• Type of credit – are your loans auto, student, mortgage, credit cards, etc.

• Use of credit limits – how much of your available credit limits is currently used up?

• Number of hard inquiries on your credit report

Why Does Your Credit Score Matter?

Since credit is simply borrowed money provided in the form of a loan, credit issuers like banks or other financial institutions want to make sure of your likelihood to repay. Consequently, they use your credit score as this indicator. Low scores indicate lower degree of repayment while higher scores indicate a higher degree of paying on time.

The amount of money you can borrow as well as the interest that you will be charged is primarily determined by your credit score rating and where you fall in the range. This is why your credit score really matters!

The following score range comes from Credit Sesame:

You don’t necessarily need perfect credit to get the best interest rates and borrowing options, but the closer you are to the 700+ range the better off you will be.

The Formula to Getting a Better Score

Given everything we have talked about the formula to getting a better credit score is pretty simple:

1. Payment History (35%) 

Pay all of your bills on time… no exceptions!

2. Credit Utilization (30%)

Do not use more than 30% of your available credit at any given time. If you are above 30% today, call up your credit card companies and ask them to increase your available credit. Doing so can instantly drop your utilization rate!

3. Age of Credit (15%)

Hold off on closing down old accounts because longer credit history is beneficial to your credit score

4. Type of Credit Outstanding (10%)

Mix the type of loans you have. Credit card debt (i.e. revolving credit lines) are penalized more than mortgage, auto, personal, and or student loans. Put another way, debt that is usually not tied to an asset is penalized more from a credit score standpoint.

5. Number of Hard Inquiries (10%)

Don’t open more than 2 credit cards a year. Usually new credit cards require a hard inquiry into your credit history and that negatively impacts your credit score

 

*Please note that this breakdown is based on the FICO scoring system. The VantageScore 3.0 credit scoring system weight each variable slightly different but Payment History is still the most important under both scoring systems.

Closing

Your credit score is one of the most important three-digit numbers you will manage in your financial life. It really can mean the difference between thousands of dollars paid over the life of a loan. When it comes to maximizing your credit score, the steps detailed within this article are the easiest and most effective ways to do so. If you only do two things, please make sure you pay your bills on time and call your credit card company today to ask for more available credit. My hope in writing this article is that after reading this, you will take some steps towards improving your credit score.

On an aside: If you currently do not use a credit monitoring service, please sign up for Credit Karma as soon as possible. It’s free to use, very effective, and can help protect you from fraudulent activity on your credit reports. Given the Equifax hack that occurred earlier this year, it’s imperative that we all monitor our credit more closely these days.