Editorial Policy

6 Steps to Build a Great Credit History

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By Eva Norlyk Smith, Ph.D.
May 14, 2010

In today’s credit environment, record default and delinquency rates on credit cards have rendered lenders much more cautious about approving credit cards for people with no or limited credit histories. The tighter lending environment leaves many consumers trapped in a classic Catch-22 dilemma: they can’t get credit without a credit history, but they can’t build a credit history without credit.

According to Fair Isaac, the company that created FICO credit scores, an estimated 22 million Americans have no credit record, an additional 30 million have too limited a credit history to give lenders a reliable picture of how lending worthy they are.

Fortunately, while it may seem like the cards are stacked against people with no or little credit history, it is easier than ever to begin to build a credit history, and you could see results in as little as 6 to 12 months. Here are some of the steps to take to start building your credit report and develop an excellent credit score:

1. Find out what’s already in your credit file. Many people have some degree of credit history, even if it’s too limited to provide a basis for lending. Even consumers who have never had a credit card or carried a loan could have a report on file, especially if they’ve shared accounts with a spouse, for example. It’s important to see what the lenders see, so pull a copy of your credit report at www.AnnualCreditReport.com. By law, every U.S. citizen is entitled to receive one free yearly report from each of the three major credit bureaus: Experian, Equifax, and Trans Union.

Check for errors on your report (either due credit bureau mistakes—or worse, identity theft) and make sure that the credit report reflects the most up-to-date information regarding your name and address, and any types of loans or credit you have carried or continue to carry.

2. Establish a checking and/or savings account. Credit card issuers view bank accounts as a sign of stability: consumers who keep money in the bank have money with which to pay bills. Also, once a consumer has established a relationship with a bank, they may be able to take advantage of small personal loans or credit cards issued by the bank.

3. Apply for a car loan and/or a small consumer loan. Local banks and credit unions are often more likely to extend credit to their loyal customers than larger, impersonal banks. Consider using a savings accounts as collateral; or, the bank may require a co-signer on the loan. The point of the loan is to begin to build a track record demonstrating that you can manage credit responsibly. When you make regular, on-time payments on the loan, this positive borrowing behavior will be reported to the credit bureaus and lay the foundation for a good credit score, as you build up your credit history. On the other hand, late or absent payments will result in a credit history with a poor credit score, which is far worse than no credit history.

4. Apply for a retail credit card. Store credit cards are often handed out more liberally than traditional credit cards, so even those with a thin or nonexistent credit file can apply and be accepted. Be aware that these cards often come with higher interest rates, however, so only make charges you can pay off before the next billing cycle. Also, not all store-branded cards report payments to the credit bureaus, so check to ensure that the card activity is indeed reported.

5. Apply online for a credit card. Lenders may issue you a credit card with a low limit, particularly if you’re a young adult, just starting out. Some card issuers, such as Capital One, are more open to people with limited credit histories, while others, like American Express, tend to favor card issuers with more of a track record.

If your credit card application gets rejected, simply wait six months and try again. If you have established the other lines of credit mentioned above and made regular payments, after six months your credit history and credit score may be sufficient to get your credit application approved.

6. Show that you can manage credit wisely. Once you have a credit card and other forms of credit, focus on building an excellent credit score. Pay all bills on time, not just credit card bills or loan payments. In addition, keep credit card balances low. It is best to not use more than 30 percent of the total available credit on the card, and preferably keep balances at 10 percent of the credit limit. Otherwise, it will look like you’re too dependent on credit, which will lower your FICO score.

With these simple steps, you will be well on your way to establish a credit history and build an excellent credit score. The rest from here is simply time, consistency, and patience.