In today’s world, having a credit history is incredibly important. Some people believe that never having credit means that they are doing the right thing, but having no credit history can make you look as bad as someone with bad credit because creditors have no idea what kind of borrower you will be. Credit histories are often summarized with a three-digit credit score. Often, people are unaware of their own credit history or how credit scores work until they need to make a big purchase like a car or a house. The good news is that building (or rebuilding) a good credit history naturally leads to a better credit score. Following a few simple tips will allow you to build a solid credit history and obtain a good credit score as quickly as possible.
Review Your Credit Report
The first thing you should do is to get copies of your credit report from the big three agencies (Equifax, Experian, and TransUnion). It’s also possible to check your credit reports through a government website. Once you have them, start going through them. Check to make sure that all of your personal information is correct. Your place of employment, name, birth date, and Social Security number should all be double-checked. Go through the listed inquiries (these happen when you ask an organization to pull your credit for any reason) and look for any you don’t recognize. Look at your accounts: People are often surprised to see that things like student loans, medical bills, utilities, and other financial activities people don’t typically think of as credit accounts can show up. Highlight anything that’s incorrect, like accounts you never opened, addresses you never lived at, or bills for medical procedures performed before your 18th birthday.
Understand How the Rules Work
There are very specific rules and regulations that dictate what sorts of information can appear on your credit report and how long information is allowed to be reported. For example, your name, address, birth date, etc., are on your credit report, but information about your salary, religion, health, gender, or race isn’t allowed to be reported. Public records like bankruptcies, judgments, and tax liens are allowable information. Most information is only allowed to be reported for seven to ten years, but there are exceptions. Closed accounts marked “paid as agreed” stay on the report for ten years. Accounts in collections stay on your report for seven years past the first missed payment, unless you resume making payments and falter again; each time you make a payment, the clock restarts. Late payments also stay on credit reports for seven years. Active accounts in good standing stay on the report indefinitely.
It’s also important to understand how inquiries work. Each time you apply for new credit or let a company pull your credit report, it creates an inquiry that stays on your report for two years. There are actually different kinds of inquiries: Soft inquiries, which occur when someone runs your credit for an account review or to make you a pre-approval offer, have no impact on your score, but hard inquiries, which you typically initiate yourself, do. While hard inquiries stay on your credit history for two years, most credit scoring systems stop factoring them into your score after 12 months.
Dispute Inaccuracies on Your Report
Now, it’s time to do something about any errors you might have found in your credit report. Start by gathering supporting evidence to dispute everything you see that’s wrong. You’ll want to make it as easy as possible for the credit bureaus to confirm your claims and remove the bad information from your reports. Supporting evidence might include birth certificates, copies of bank statements, credit card statements, death certificates, divorce decrees, your Social Security number, and proof of identification (like a driver’s license or passport). All of the credit bureaus have ways to dispute items directly from their websites.
Start Building Your Credit
Most new credit accounts will be reported to the credit agencies. This is especially true of credit cards. Any card backed by a major bank will report monthly, which is great for new (or rebuilding) histories. You may want to start by getting a secured card. A secured card works in many ways like other credit cards: You have a credit limit and a payment due date, you incur interest on your balance, and you can even get rewards with some cards. The main difference is that the issuing bank requires you to make a deposit (usually equal to your credit limit) of an amount ranging from $200 to $2,500. As long as you pay your account off, the money is returned to you when you close the account or, in some cases, when the card becomes an unsecured credit card. Another option to consider is asking to become an authorized user on a parent or spouse’s existing card. Their good payment history will help boost your own credit.
It’s also important to be strategic. Don’t apply for a bunch of cards at one time! Inquiries do have an impact on your credit score, and several new accounts at once can make credit underwriters nervous. Another important tip is to have a mix of accounts, not just credit cards. Student loans and utility accounts can help diversify your report and give you a good mix of accounts.
Don’t have any credit and need extra cash? Some places provide personal loans and title loans with most credit types accepted.
Make Payments on Time
Once you have credit accounts, the most important thing you can do is to always pay your debts on time. Do whatever it takes: Schedule automatic payments for the minimum payment, go into your bank’s bill-pay system and set up a recurring payment, put alerts on your phone, or mark it on the calendar. Making your payments on time is the number one thing you can do to build (or rebuild) a good credit history. Remember that late payments stay on your credit report for at least seven years. If you miss a payment, make it as soon as possible, then contact the creditor and ask if they will remove the late payment report from your credit history. But even if they don’t, it’s still important to get the account up to date as quickly as possible.
One important factor in your credit score is what’s known as your credit utilization. Basically, this reflects how much of your available credit you are using when the companies holding your debt report to the credit bureaus. Most experts suggest using less than 30% of your limit on any credit card; lowering that percentage will help you raise your score. It’s important that the debt-to-available-credit ratio is low when the card company reports to the big three credit agencies. So outside of making sure that you always pay by the due date, also try to make sure that you pay before the end of the billing cycle. Some people find it easier just to pay their card every time they get a paycheck. This might sound nit-picky, but credit utilization is the second most influential factor in your credit score (coming only after payment history). It’s also a very fast way to impact your credit score. Paying down a card will be reflected as soon as the card company sends in its monthly report.