How to Build Your Credit: Part I

When you apply for credit, such as a home or auto loan, the lender examines your credit report to determine whether or not credit should be extended to you. Your credit history and credit score are used to gauge your creditworthiness.

Your credit report can be the difference between one interest rate and another, or even between approval and denial for credit. It affects your ability to rent an apartment or purchase a home, or even to obtain a job.

If you lack a history of credit, lenders have no idea whether or not they should risk lending to you, and so often they do not. We so often hear horror stories about what can happen when people abuse credit and become swamped with debt, but the reality is that delving into credit to build a history is both necessary and very responsible.

Life is uncertain, and you never know when you might need to obtain an emergency loan – a task much easier accomplished by those with established credit. It is best to start building up your credit history as early as possible. The following tips are a great place of departure for building up your credit:

The Earlier the Better

Minors may be able to jumpstart their credit histories by opening up a checking and savings account. Many banks allow such action, but those that do not certainly will allow a minor to open a joint account with a parent. While checking and savings accounts will not have an affect on one’s credit score, it does convey to lenders a sense of stability and responsibility.

Revolving Credit

Revolving credit extends a certain amount of credit to a consumer, who may borrow as much as he or she wishes up the limit. Once the balance has been paid, the original amount is once again available. Credit cards, a type of revolving credit, offer individuals the most opportunities to build credit.

Because credit card companies generally assume that parents will help their children should they rack up debt, college students usually are able to obtain credit cards more easily than anyone else. One or two credit cards should be sufficient for a beginner.

Credit cards are best for building credit when one consistently charges and pays off a small monthly balance. It is not wise to charge more than you are able to pay in any given month, because paying only the minimum and leaving a balance on your card will not help to build up credit more quickly.

As a general rule, you should not charge up more than 30% of the card’s credit limit. Any more than this amount will not help to build your credit positively. Furthermore, putting large amounts on your credit card makes it much easier to charge more than you are able to pay – definitely not your goal!

If you are unable to obtain a traditional credit card, you should apply for a secured card. A secured credit card necessitates that you make a down payment to the card lender before credit is extended. Such credit is not as risky for the lender because your down payment may be confiscated should you fail to pay off your balance. Hence, it is much easier to obtain, and otherwise works the same way to build up your credit.

Another type of card you might consider getting is a store card, or a card that may be used at only one chain of stores (such as a Macy’s card or American Eagle card). One or two such cards can be useful for building credit, although they do not have as much of an impact as other cards. They also are easier to obtain.

Go to Part II of this article.