How to Build Credit
Establishing and using credit is almost a necessity in today's financial world. A frustrating fact for those who don't have credit is the Catch-22 scenario -- applicants need a credit history to be granted credit, but without being granted credit, they have no credit history... It is possible to create a credit history from nothing, fortunately. Here's how to build credit using these three steps:
Establish Credit by Starting Small
There are several ways to establish credit. Start a credit history by applying for educational loans or opening a retail credit card. These accounts are generally easier to open than major credit cards issued by banks and financial institutions. Another way to start a credit history is to borrow a small personal loan from a bank or credit union. Getting approved for a loan without prior credit and will likely require a co-signer such as a family member who has good credit.
If a co-signer is not an option, opening a secured credit card can be helpful. The credit line on a secured credit card is backed by a savings account held by the issuer of the credit card. A secured credit card can be used to establish a repayment history and credit scores, but fees and finance charges can be high. Consumers should make sure the issuer reports their credit history to the major bureaus -- TransUnion, Equifax and Experian, or the account will do them little good.
Another way to establish a credit history is to "piggy back" onto someone who has good credit. That's accomplished by having a relative or close friend add the consumer as an "authorized user" to an account (he or she never actually uses the account and needn't even know what the account number is). In this case, the payment history on that account is picked up bu bureaus and added to the credit report of the authorized user.
Pay on Time Every Time
Borrowers must consistently pay any loan or credit card on time and without fail. Making credit card and loan payments well before their due dates and paying more than minimum payments also demonstrates financial responsibility. (FICO), the leading provider of credit scoring systems, reports that payment history accounts for 35 percent of a consumer's credit score. Establishing a history of timely payments is one of the most important things borrowers can do to establish and improve credit.
Maintain and Manage Credit
How to build credit is the first half of maintaining and improving a healthy credit profile. After establishing credit and opening one or two credit card accounts, consumers can easily fall into a trap of using too much credit. Credit scores are partially based on something called credit utilization, which measures how much of assigned credit lines are used. In general, financial experts encourage people to use no more than about a third of their available credit. The safest method of managing credit card use is spending no more than can be repaid entirely within each billing cycle.
It can be tempting to open multiple credit cards, but this can encourage overspending and mounting debt. Instead, opening different types of credit can help raise consumer credit scores. For example, having two credit cards, one car loan and a student loan would be better than having five credit cards and no other types of credit. FICO considers types of credit opened as 10 percent of a consumer credit score.
Preventative measures are part of how to build credit and keep it. Consumers should check their credit and scores periodically to make sure their efforts are being rewarded and that no identity theft is going on. This is easy to do on LendingTree, and it's truly free -- no credit card number or contract is required. Maintaining good credit requires ongoing effort to avoid overspending and regular review of credit reports to prevent and detect fraudulent use of credit.
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