I'm turning 42 next year, and I've never had a credit card. I'm single, and I rent my apartment. I would like to establish a good credit record because I'm considering getting a car. My income is steady, but not very high. Have I waited too long to get good credit? What can I do to get on the fast track, and what are the first steps you recommend I take? – Juanita
The good news is that it is never too late to begin building credit. You seem concerned about your age, but, really, there's nothing too different between your situation and that of a new college grad with a limited credit history. In fact, I'm going to prescribe the same regimen I'd recommend to a young credit-less person. If you follow it, you can expect your credit to improve within a year.
Actually, you may already be able to get a car loan, even with your thin credit history. It is not difficult to get approved for a car loan, and even people with poor credit may qualify. However, those with bad (or no) credit pay a considerable premium in interest. Check out this auto loan calculator from myFICO.com. Interest rates fluctuate each day, but as of this writing, for a 48-month car loan on a used car, someone with excellent credit would pay 5.246 percent interest, whereas someone with very bad credit would pay 19.96 percent.
So, if your FICO score (we'll get to what that is in a moment) is below 659, you're better off postponing your loan until your FICO score is in the 660-to-689 range, where you'd pay 10.29 percent in interest (at current levels), or even better, in the 690-to-719 range, where you'd be paying 7.481 percent at today's rates (again, according to the auto loan calculator).
Now that you have a goal, take these steps to jump-start your credit:
1. Pull a free copy of your credit reports. Everyone is entitled to a free copy once a year of their three credit reports — one each from the three major credit monitoring bureaus (Experian, Equifax and TransUnion). Simply go to AnnualCreditReport.com to download the reports. Or, if you prefer, start with one agency now, and then download another free report in six months to ensure that your credit-building activities are properly recorded. Then pull the last one nine months from now. By spreading it out like that, you'll be able to download a free report every four months to keep tabs on your credit.
Once you have your credit reports, look them over for accuracy. Presumably there won't be much information on them, but it's good to double check. If there are any errors (such as accounts that aren't yours), dispute them by following this guide.
2. Check your FICO scores. Your credit reports will give you an idea of the information lenders will see when they check your credit. Yet they won't tell you which information is being weighted the most heavily or exactly how badly your thin credit history is hurting you. To see exactly where you stand, consider paying to get your FICO scores. FICO is the credit score most commonly used by lenders, and it's calculated based on the information in your credit reports. You can get your scores at myFICO.com for $19.95 per score (again, you'll have three — one from each bureau) . Once you know your scores, plug them in to that auto loan calculator and see what interest rate you can expect. You'll then have a better idea of how far you have to go.
3. Get a credit card. Payment history (how often you've paid debt obligations on time in the past) is the single biggest contributor to FICO scores — and a credit card is a good way to build a healthy score. If your score is above 641 but below 700, you have average credit, and you can apply for a credit card for people with fair credit. If your score is below 640, your best option will be to apply for a secured credit card. With secured cards, you deposit an amount to secure the credit limit. So, to get a $500 credit limit, you'd deposit $500. Some “hybrid” secured cards allow you to secure a credit line slightly higher than the deposit. Try to get a card with at least a $1,000 limit so that you're not constantly worrying about scraping your credit ceiling.
4. Use your credit card regularly. Once you have a credit card, it's easy to improve your credit score. Simply use the card regularly and pay the balance off in full at the end of the month. Because using a lot of your available credit on cards can draw down your credit score, always keep balances below 20 percent of the credit limit (and never above 30 percent).
5. Add another card. After six to 12 months, you should see your FICO scores begin to increase. At that point, you will get other credit card offers in the mail, so consider adding one or two more credit cards. Secured cards often come with fees, so you'll probably want to cancel yours once you can get regular cards. Just make sure you get approved for a car loan first, as canceling a card can cause a temporary dip in your credit score.
As this simple strategy shows, there's nothing particularly difficult about building credit, no matter when in life you start. It just takes time, persistence, and good money-management habits — all qualities that will help you greatly once you land that auto loan to buy yourself your first car.
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