Building a Strong Credit History from Scratch

Having a good credit score is essential to most things. You’ll need good credit to rent an apartment, get a car loan, and a good credit score is especially important when it comes to a mortgage on a new home. But what happens if your score is low because you don’t have a credit history? It may seem counterintuitive, but having a credit card (and paying it off in full each month!) or taking out a loan can actually help you get ahead of the game when it comes to building a good credit history.

Like all things in life, you have to start somewhere, and establishing your credit history is no different.

If you intend to buy a home at some point, your mortgage lender will want to see you have a strong credit history with a good credit score in order to be approved for a loan.

What goes into a good credit score?

From the moment you take out your first line of credit, you’ll have a credit score. Your goal should be to build and maintain a high score, since it’ll provide you access to the best terms and rates when it comes to financial services. So how can you achieve a high credit score?

• Make on-time payments – This also applies to things like medical and utility bills, since unpaid balances can be sold to collection agencies, which can severely damage your credit.

• Don’t go crazy opening credit accounts – With so many seemingly amazing credit card offers, it’s easy to consider applying for them all to reap the benefits of travel, gas or shopping points. However, each time you apply for a credit card, a credit inquiry shows on your report, and lenders may perceive you as a higher risk.

• Don’t close accounts – The longer your credit history spans, the better off you’ll be. That’s why it’s usually a good idea to keep your credit card accounts open, even if you aren’t using them. This is especially true of your oldest line of credit – try to keep that one open for as long as possible.

• Keep your utilization low – If at all possible, pay off your credit cards each month. If you do carry a balance, keep close tabs on your utilization (your credit card balance as compared to your limit) – and try not to let it exceed 30% of your credit limit.

How do I begin building credit?

Now that you know what goes into a good score, you’re probably wondering how you can start working on your credit. Fortunately, it’s not as hard as it may seem to get started.

1. Get an entry-level credit card

You have several different options when it comes to a starter credit card, but the great thing about these is that you need little to no credit in order to be approved. Consider one of the following options:

• Student credit card – Start working on your credit as early as possible with this type of card fit for young adults in school. While you probably won’t have a significant credit limit, using your card and paying it off monthly provides good practice for maintaining your finances.

• Secured credit card – This type of card requires you to put down a security deposit, and your credit line will be based on your income and the security deposit amount. If you choose to close the account, your deposit will be returned to you.

2. Take out a credit-builder loan

This type of loan allows you to borrow a sum of money, but provides a safety net for the lender since the money is deposited in a savings account until you’ve fully repaid the loan. Paying your loan as agreed upon means a good report will be sent to the credit bureaus, and you’ll likely see a significant improvement in your credit score as a result.

3. Become an authorized user

When I was a teenager, my mom added me as an authorized user to a store credit card in her name. Fortunately, she trusted me to make responsible purchase decisions and of course, I had to pay my balance on the credit card! The best thing this did was help me begin building a credit history before I entered the ‘real world.’ Just be sure you are added as a fully authorized user in order to reap the benefits. If you were required to provide your social security number, chances are you’re fully authorized.

4. Utilize your student loans

Let’s be real, student loans are probably not your favorite souvenir from college. But they’re considered to be installment loans, so your student loans will help you build credit as they’re paid off.

It’s important to note that a student loan on its own may not be enough to quickly raise your credit score, so try to also incorporate another credit-building idea or two into your repertoire.

5. Co-sign on a loan

With little to no credit history, taking out a personal loan or a vehicle loan might be challenging. However, if you have a friend or family member with strong credit who is willing to co-sign on a loan, you’ll have a better chance of getting approved. Paying your monthly payments on time will help build you and your co-signer’s credit – but on the contrary – failing to meet your loan payment terms means you (and your co-signer’s good credit) will suffer. Think carefully before you proceed with this option! Follow these credit-building tips to be well on your way toward establishing a strong credit history and being able to qualify for a large loan like a mortgage on a new home. When you’re ready, get in touch with a mortgage banker to discuss your journey to homeownership.