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How to Start Building Your Credit History

You may or may not realize how important your credit score has become. These days, it seems like everyone is looking at your payment history for some reason or another. Credit scores are used to help assess a range of risks, and using them has become so commonplace that you would be forgiven for forgetting how big a factor it plays in your life. We’re used to thinking about our credit score if we’re trying to get the best interest rates when taking out an auto loan to finance a car, opening a revolving credit line, getting a new credit card or even buying a home. But what about renting a home, looking for a new job, getting insurance or even a new cell phone? Your credit score affects more parts of your daily life than ever, so it makes sense to make sure you’re building a strong credit history.

Building a credit history and credit score isn’t especially complicated but it does take time. It can also be a little more challenging when you’re just starting out, but it’s important to do so and build credit as you go. This guide may help you understand how to establish good credit habits, develop a good credit score and become the kind of borrower that lenders want to serve.

Who produces credit scores?

There are two main providers of credit scores: FICO (formerly Fair, Isaac & Company) and VantageScore. Each of these companies has created and maintains a number of models that produce a range of different credit scores that are used by lenders, landlords, service providers, insurance companies and others. Your credit score is a number derived from information that is in your credit report. Credit reports are produced and maintained by credit reporting bureaus, where lenders and others store information about your borrowing and repayment habits.

FICO and VantageScore offer their customers -- lenders, insurance companies, landlords and countless others — a range of credit scoring models to use, and each of these models uses different weights for different aspects of your credit report. Because there are many models being used, you actually have not just one but a number of different FICO scores that a creditor will use. Which one usually depends on the kind of credit you are seeking.

Who are the credit reporting bureaus?

There are three major credit reporting bureaus: Equifax, Experian and TransUnion. Lenders or others may report details of your financial activities to them -- when you took a loan or asked for credit, how much credit was extended to you, your credit utilization, when you made or missed payments. Your credit report will also show your credit mix, whether or not you have made any late payments, defaulted on an loans and other details.

Finding out your credit history

While it can be useful to request individual credit reports from each of the credit bureaus, there's a simpler method you can use to find out your credit history: the website AnnualCreditReport.com provides a report consolidated from all three major credit bureaus. Authorized and required by federal law, this service is provided and managed by the three bureaus. Getting this report is free of charge to you, and you can get one update each year at no cost.

How can I build credit?

Before you can build a credit report and credit score, you'll first need to establish credit. However, it can be difficult to get credit if you don't have much of a credit profile for a lender to review. If you have only a few (or no) accounts listed in your credit report, or they don't have much by way of payment history attached to them, you have what is known as a "thin file", and this can make it hard to get a new loan.

Here are some ways you can build or enhance your credit rating and credit score.

Become an Authorized User

One of the easiest ways to start building a good credit history is to get added as an "authorized user" on someone else’s credit card or other line of credit. This is fairly simple: All you need to do is find a family member or friend that is willing to add you to their revolving credit account; you then essentially piggyback off their credit in order to establish or improve your own credit history.

It's important to make sure that you choose a cardholder who has a strong history of making on-time payments. Since your name is also on the account, any late payments they may make could end up harming your credit history as well.

Becoming an authorized user is a good way for younger people to start building credit, since some credit card companies don't even have minimum age requirements to be added. This can allow someone to get a head start on 0establishing and building a credit history even before they are even 18 years old.

Get Credit for Paying Current Bills, Utility Bills, and Rent

Another option that you may have heard about in recent years is a different way to establish your credit history by taking advantage of the on-time payments that you’re already making for other types of credit you may have. Self, RentalKharma, and Experian Boost are some examples of companies that offer services to build or enhance your credit profile using other monthly payments you are already making. Typically, these work by having you connect the bank account that you use to make your regular payments to service providers, then verify the information that you want to be reported to the credit bureaus. Not all companies or landlords participate in these arrangements, so the exact process, eligible payments, and the bureaus that receive the information will differ depending on the products or providers with whom you have accounts.

Look for a Credit Builder Loan

Another avenue to explore is a credit builder loan. According to the Consumer Financial Protection Bureau, banks, credit unions, or specialized lenders may be able to provide you with a kind of reverse personal loan. You don't receive any funds up front; the lender will place a small amount (typically $300-$1,000) in a locked escrow account. The "borrower" looking to build credit then makes regular monthly payments which include interest and any fees over a term of 6 to 24 months. As this occurs, the lender reports these payments to the major credit bureaus (Experian, Equifax, TransUnion), and the "borrower" builds a payment history over that time, developing or bolstering their credit history and credit score. At the end of the term, the accumulated funds are released to the borrower. In all, it's a kind of "forced" savings account, but one that can help you develop the kind of financial discipline that can make you a responsible borrower with a higher credit score over time.

Since no funds are actually lent this type of arrangement is a low-risk affair for the lender.

Does it work? The CFPB study found that study "Participants without an existing loan, opening a credit builder loan (CBL) increased their likelihood of having a credit score by 24 percent," and "Participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt."

Consider a Secured Credit Card

Of course, you might also choose a tried-and-true method of establishing and building your credit report by taking out a secured credit card. Secured credit cards are useful for folks who are looking to establish a credit history or rebuild or enhance their credit. For many people, a secured credit card is actually the first credit card they get.

How do they work? A secured credit card sees the borrower deposit money (typically $500 or more) in an account with a lender as collateral. The lender issues a credit card to the borrower with a line of credit up to the amount of the security deposit. The borrower then uses the credit card just as they would any other credit card. The credit card issuer will in turn report payments to the credit bureaus and this contributes to credit building and grows the borrower’s credit file.

Before you sign up for one, make sure to ask your credit card issuer about reporting to the credit bureaus to make sure the payment history in your credit report is being developed. If they do, all you’ll need to do is proceed to use the card responsibly to make purchases, make on-time payments and look to keep your regular credit utilization low, typically 30% of your available limit or less.

Secured credit cards can have some drawbacks, too, such as high up-front or annual fees or high interest rates or APRs. Since not all lenders offer secured credit cards, you'll want to shop around and compare offers before opening one.

Some secured cards can transition to being a traditional unsecured card after a certain period of time if the borrower has made payments according to the terms of their agreement.

Maintaining your credit

So now you’ve been added to a family member’s credit card as an authorized user, you’re making on-time payments on your credit builder loan, you’re using your secured credit card responsibility and paying your balance down or off every month, and maybe even getting credit for your rent payments and monthly cell phone bill.

You are officially on the road to great credit. So what do you do now? Developing and maintaining a great credit rating is all about repetition: borrowing small amounts routinely and making on-time payments over a stretch of time. Here are a few tips to help you along your path to getting and maintaining great credit:

Keep paying your bills

Pay your bills on time every month. This is the most important aspect of building your credit history and raising your credit score. It's okay not to be able to repay the balance in full each month, but you must at least make the required minimum payment for each account. Missed payments and late payments will hurt your credit score and undo your hard work. If you have trouble hitting regular deadlines, put those due dates on your calendar, set reminders in your phone, a sticky note on your fridge, whatever is going to help you remember. A lender may allow you to set up monthly auto-payments from a checking or savings account which can help ensure monthly payments are made on time.

Be thoughtful about your credit utilization

Whether secured or unsecured, your credit card will have a credit limit. This that is the maximum amount of money that your creditor will allow you to borrow. While you'll want to use your new credit card to help build your credit history, it's not a great idea to use up all the available credit that has been extended to you. Your credit score is partly based on your credit utilization ratio, that it, how much of your available credit is in use at any one moment. Most credit experts suggest you keep your credit utilization ratio at 30% of your credit limit or less.

A low credit utilization ratio can help keep you from amassing too much credit card debt and leave some credit available in case of an emergency, all while demonstrating your responsible use of credit. Get in the habit of making smaller purchases and paying credit card balances off quickly. Keep in mind that routinely high credit utilization ratio and/or late payments on credit card accounts or installment loans are factors that can lead to a bad credit score.

Monitor your credit reports

As you're establishing an building your credit profile, you'll want to keep tabs on both your credit reports and credit score as you go along. This can help you stay alert to any unusual activity on your accounts and even help prevent identity theft or fraud from happening.

There are multiple companies that offer credit monitoring services to provide you with real-time alerts about your credit history, such as the opening of new accounts, significant changes or unusual activity in an account. Your bank or credit card provider may also provide you with free access to your credit score.

As noted above, you can also do some homework yourself by requesting your credit report from AnnualCreditScore.com. This is the only source that is fully authorized by the U.S. government and provides a completely free credit score to use. This consolidated file from all three credit reporting bureaus can give you a fast review of your credit history.

Even if you do review your credit report, it can still be a good idea to review individual credit reports from each of the credit bureaus. You might not know that not all creditors report to all three credit bureaus, so accounts may appear on one credit report but not another. Also, with three separate sets of records maintained by three separate companies, outdated or inaccurate information may appear in one or more reports. It's up to you to make any changes or correct any inaccuracies in your credit profile.

To do so, you can reach out to the major credit bureaus to attempt to resolve them, though you may end up needing some outside help if the issue is particularly tricky. Per the law, Americans are entitled to a free credit report each year from the three reporting agencies at no cost.

Credit bureau contact information:

Establishing and maintaining a strong credit history and good credit score is something that will pay dividends for you over and over. It’s a key component of personal finance, and it's really not that hard to do; all you really need to do is use your credit carefully and make payments on time. Do this over time, and you'll get access to lower interest rates when you borrow, greater access to credit when you need it — and lenders that will be eager to work with you.

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