Building your credit history is an essential part of personal finance. Without a good credit history, you can’t develop a good credit score. Without a good credit score, you’ll pay higher interest on mortgages, auto financing, and other loans, and be limited to more expensive payment options, such as prepaid cards and high-fee credit cards.
Your credit history matters in other ways, too: Lenders, landlords, employers, cell phone, utility, and credit card companies or insurance providers may want a peek at your payment habits. Poor financial health could even be a deal-breaker when it comes to romance.
For those with little or no credit experience, as few as six months’ worth of smart money moves can generate decent files with the three major credit bureaus (Equifax, Experian and TransUnion). It takes longer if you’re rebuilding credit history after previous money mishaps. But while issues like bankruptcy or foreclosure linger for years, establishing a pattern of responsible financial choices should have a positive impact within 12 months.
The following tips can help you build (or rebuild) your credit history.
1. Read your credit report
You’re entitled to one free report a year from all three bureaus. Credit expert Becky House suggests checking for mistakes or for other issues, such as an old bill being sent to collections. “That information is critical,” says House, education and communication director for American Financial Solutions, a Seattle-based nonprofit credit counseling agency.
Don’t recognize an account? This could be a sign that someone took out a credit card or loan in your name. The Federal Trade Commission’s IdentityTheft.gov website can help.
2. Get a secured card
Those with no credit or a checkered past might be able to get a credit card by securing it with a deposit. Secured cards improve your credit history the same way traditional ones do. (Make sure the issuer reports to the three major bureaus.)
Putting a monthly expense – utility bill, Netflix account – on a secured card is ideal, according to House: “That way (consumers) are not incurring debt, or buying something they do not need. Keep card usage low. Don’t use more than 30% of your credit limit; for best results, spend no more than 10% of your available credit line.
3. Pay bills on time
Late payments have a negative effect on your credit and can lead to credit card debt through high-interest rates. In fact, payment history determines 35% of your FICO score. Set up auto-pay if you’re the forgetful type.
4. Become an authorized user
Can’t get a secured card just yet? See if a relative or friend will add you to their existing account, which means you’ll build a history of credit use and payments.
Sign an agreement about spending limits and how you’ll pay your share. After that, “do your part and use the card responsibly,” says Beverly Harzog, consumer advocate and credit card expert for U.S. News & World Report and author of “The Debt Escape Plan.”
5. Look for a credit-builder loan
Generally offered by credit unions and community banks, these short-term loans are unusual in that you don’t get the money right away. Instead, the loan goes into a savings account while you make monthly payments. At the end of the term, the money is yours. According to Harzog, it’s a good option for those who’ve had spending problems in the past. The loan allows them to “build credit and not have the opportunity to overspend,” the way they might with a card.
6. Mix it up
Let’s say you obtained a secured card or a credit-builder loan and are making on-time payments. Excellent! But a mix of credit can help improve your track record and get you on the path of building credit. For example, student loans. These count! So if you’ve got student debt, don’t miss a single payment.
Lending circles. You join a small group, receive financial education, and contribute as little as $50 per month. Each month, a different member gets the money. After you finish the program, your information gets reported to the bureaus. According to the nonprofit Mission Assets Fund, the average participant’s score increased by 168 points. Use the link to search for programs in your region.
Rent reporting. Sites like Rental Kharma and ClearNow will report rent payments to the credit bureaus. There’s usually a fee, but not always.
Installment loan. First, save up for an appliance or a piece of furniture. Next, take out a short-term financing deal and pay it off.
7. Create a budget
A simple plan is the 50/30/20 budget: Spend no more than half your after-tax pay for needs, 30% for “wants,” and 20% for savings and debt repayment. “When you have (a budget) in place, it won’t be hard to make your payments on time,” Harzog says.
Your credit history has an enormous impact on your life. The best time to build one was 10 years ago. The second-best time is right now.