When you have no history of buying anything on credit and are just starting out, how to build your credit the right way should be a priority learning experience. It isn’t all that difficult to build up a good credit history, as long as you follow a few simple suggestions.
What’s in your FICO Score
When you have good credit, it means you have a good to excellent credit score, popularly called a FICO score. Included in the calculations of your FICO score (along with percentages) are: payment history (35%); credit utilization, or how much of your credit you are using (30%); length of credit history (15%);recently issued credit (10%), and types of credit used (10%).
FICO scores range between 300 and 850 and higher is better. The higher your FICO score, the more your chances improve to obtain a lower interest rate and incur less overall costs on a major purchase, such as a home.
More than 22 million Americans don’t have a credit record – and 30 million more have “very thin” credit files.
- Make buying on credit part of your overall household spending. Sure, the idea of going cardless and only paying cash for everything sounds like a good idea, but when you want or need to make a major purchase, if you haven’t established credit and maintained a good history, your chances of getting a mortgage or buying a car or snowplow or boat go down dramatically – unless you pay cash. Who’s got $30,000-plus (the average price of a new car) to several hundred thousand dollars in the bank to spare?
- Take out a small personal loan. One suggestion is to go to your bank or credit union and apply for and take out a small personal loan. Make sure you pay it off as quickly as possible, thus establishing both a credit record and paying on time.
- Get a secured credit card. Here, you put up a certain amount of money as collateral, say $200, and use the secured credit card up to the amount of your credit line (which is equal to your collateral used as down payment). Be sure to pay your charges each month, since a secured credit card is not a debit card. The collateral is just insurance for the lender that you have enough money to cover charges up to your credit line. The good news is that each month, your bank that issued the secured credit card reports your payments to the credit bureaus, who keep track of your credit history – which you’ve now established.
- Obtain a credit card only used for automated purchases. The idea here is to use the credit card only to pay for recurring bills, such as utilities, cable, or other expenses and to automate a payment from your checking account to pay the bill in full. This helps you build credit responsibly and removes the temptation to overuse the credit card. Of course, you have to deny yourself access to this card. Don’t keep it in your wallet or purse. Lock it up in a safe or shred it or give it to a family member and instruct them to never give it to you.
- Check your credit report and score. Keeping tabs on your credit report score, once you’ve established credit and are making your payments on time each month, will give you a better idea of how your credit is building. According to the 2012 Consumer Financial Literacy Survey, 44 percent of Americans have checked their credit score in the past year vs. 37 percent in 2011. However, most adults have neither reviewed their credit score (55%) nor their credit report (62%).