Establishing credit is one of the most important things you'll ever do. Good credit is essential throughout your life, whether you want to buy a house or car, get insurance, or maybe even pay less of a deposit for utilities.
Unfortunately, building credit without a credit history isn't easy. Creditors aren't keen on extending credit to someone without a credit score because they don't know the level of risk involved.
Review your credit report
Before you get started, you need to verify that a criminal hasn't already established a credit history for you. It's possible, as the Federal Trade Commission (FTC) estimates that 9 million Americans have their identity stolen each year. To do this, you'll need to request a copy of your credit report. The easiest way to do this is through FreeCreditReport.com, the authorized website for ordering free credit reports guaranteed by the Fair Credit Reporting Act.
If your credit report includes incorrect information or accounts, you'll need to contact the credit reporting agency and the information provider to dispute the error. If you suspect identity theft, you'll need to place a fraud alert on your credit report, close those accounts and file a police report and a complaint with the FTC.
Apply for a credit card
Once you know your credit history is clear, it's time to get to work. A credit card will likely be the easiest way to establish credit, although qualifying for one may be harder than you expect. You have a few options: become a joint account holder on someone else's card, apply for a secured credit card or open a store or gas card.
Choose just one or two cards — you don't want or need to open too many accounts quickly. Credit inquiries take points off your credit score, more so for someone with few credit accounts or a short history.
To become a joint account holder, you need to be added to someone else's already established unsecured major credit card. This can be risky for both of you, as their credit mistakes can become yours, and vice versa.
A secured credit card may be your best option for a first credit card. Secured credit cards work like unsecured credit cards but require a deposit in the issuing bank. The credit limit is generally set at the same amount of the deposit. Look for a secured credit card with no application fee and a low annual fee that reports to all three credit bureaus. This is important, since you can't establish credit if your credit accounts aren't being reported.
It's necessary to remember that you're still required to make monthly payments despite the deposit required for application. That money is earning interest in a savings account, money market or certificate of deposit while your account is open. Your deposit is returned when you close your account or your responsible usage qualifies you for an unsecured credit card with the same issuer.
While gas or department store cards are oftentimes easier to qualify for, they impact your credit score less positively than secured and unsecured credit cards. Still, one isn't a bad credit building block as long as you don't get carried away and charge a whole new wardrobe, or spend your gasoline budget elsewhere instead of paying off the balance each month.
Use credit carefully
Once you have a credit card in hand, use it carefully. Your goal isn't to pay interest or charge a significant amount — your credit score isn't based on either. And be sure to stay well under your credit limit; your credit score may be impacted if your total debt compared to the total credit available, known as your debt-to-credit ratio, is over 50 percent. A couple of minor purchases a month and on-time payments will produce a consistent positive feed on your new credit report.
Check your credit score
After a year of using credit, check your progress by purchasing your credit score and credit report from one of the credit bureaus, or from FICO (formerly known as Fair Isaac Corporation), the company that created the first credit score system.
You'll be able to quickly see if you've developed any bad credit habits, such as making payments late or carrying high balances. Do yourself a favor and break any bad habits right away. Misusing credit can land you with a mountain of debit — and a credit score to repair. And building credit can be much more difficult the second time around.
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