How to Establish Credit
When you have little or no credit history, applying for loans and credit can be difficult, if not impossible. Lenders like to see a record of payment history and a current credit score before they extend credit or loans. This information also helps them determine what interest rate to offer.
If you do not have a credit history, here are some ways to build it one:
Understand What Lenders Are Looking For
If you are looking to establish credit for the first time, lenders can’t look to your credit score to decide whether or not to lend you money. In these situations they have to examine other factors that can help them decide if you are a good credit risk or not. Here are basic guidelines to follow to establish or re-establish your credit:
- First and foremost, pay any bills that come your way on time.
- If you don’t have a checking account, open one. You have very little credibility with lenders if you don’t have at least a checking account and preferably a savings account as well. Just as importantly, be sure not to overdraw your bank account. Bouncing checks sends a signal to potential lenders that you can’t manage your daily finances and are therefore not a good credit risk.
- Establishing a relationship with a bank will improve your chances in obtaining a loan or credit card through them. If you already do business with a bank, they should be the first place to look.
- Open a charge card with a local department store or apply for a gasoline credit card. Pay off the entire balance each month. Remember, if you cannot pay off the balance each month, you are spending outside your means.
- Keep in mind that a lender or creditor may say you are approved for a particular amount, but that does not mean you have the resources to repay it quickly. Borrow only what you can afford to repay quickly.
- Another important factor lenders look at is your employment history. They want to see if you are able to hold a job or if there are periods of unemployment. Your ability to hold a steady job can improve the likelihood of getting approved.
- Lenders will also look to see how often you move and whether you rent or own. As with employment history, it pays to have a stable residence.
- Even without a credit history, it is possible to sign up for many utilities in your own name. Having an electric or gas bill, telephone, cable, or water service in your name also helps. Just having your name on these accounts won’t establish a credit score, but it can be helpful for first-time borrowers.
- Get a secured credit card. To obtain this type of card, you deposit a specified amount of money into a financial institution who will then issue you a bank credit card. The amount you deposit is your credit limit. After you maintain that account in good standing for a while, you may be able to obtain a regular credit card or loan.
Establishing Credit is Only the First Step
Establishing a good credit history takes time. There are no shortcuts or tricks that can take you from no credit at all to a high score in a matter of months. Remember – your credit score is based on a number of factors such as payment history, length of time you’ve had credit, how much you owe and much more. Here are a few “don’ts” to keep in mind:
- Don’t overdraw your bank account. You will be charged fees, and you can damage your credit record.
- Don’t miss payments on bills or loans. Late payments count against you.
- Don’t let other people use your bank account, credit card, debit card or ATM card. You are responsible for what they do with it.
- Don’t leave utilities (gas, water, telephone, electric, cable) in your name if you move. Always close out or transfer all accounts before you move. If accounts are in your name, they’re still your responsibility.
- Don’t forget to account for recurring bills on your credit card, such as subscriptions or club dues.