How to build a solid credit history
Building a credit history takes work and, unfortunately, doesn’t happen overnight. However, there are things you can do to improve your credit history, which we’ll detail below.
Start with what you can afford
You may need to apply for some type of credit or loan to establish a credit history. Stick to the basic rule that you shouldn’t borrow more than you can afford to repay. You might want to consider a few types of loans that people with little or no credit history can use to build credit:
- Secure bank cards: Secured credit cards require a cash deposit to open an account. This reduces the risk for the credit card issuer. For example, you could post a $200 security deposit and in return receive a $1,000 line of credit. Eventually, you may be able to apply for an unsecured card if you make your regular payments.
- Authorized User Credit Cards: As an authorized user, you can use the primary account holder’s credit card. You would have access to your own credit card connected to the main user’s account. As an authorized user, you can access the account without having to complete an additional application or undergo a credit check.
- Credit-generating loans: Credit loans are used to make fixed payments to a lender (who holds your money in a bank owned by the lender). At the end of the loan term, you have access to the loan amount.
- Co-signed loans: Co-signed loans include someone else who agrees to take responsibility if you don’t make your payments. It is important to choose someone you trust to help you establish a good credit history.
- Student credit cards: If you are a student, you can also apply for a student credit card. A student credit card typically offers lower credit limits and few incentives, but gives you a head start in building credit.
Pay your bills on time
Credit history places a lot of emphasis on getting accounts paid on time. As mentioned earlier, a FICO® Score category comprises 35% of your payment history. Pay your bills on time each month, even if you can only make the minimum monthly payment.
Late payments will show up on your credit history and may impact your credit score. They can also stay on your credit report for up to 7.5 years, although the impact of late payments diminishes over time.
Keep your accounts open
The longer you hold accounts, the stronger your credit history will be. Avoid closing lines of credit whenever possible. This action can increase your credit utilization, which refers to the ratio of your total credit to total debt, expressed as a percentage.
For example, if you have two credit cards with a limit of $1,000 each and you owe $500 on both, your credit utilization ratio is $1,000/$2,000, or 50%. You want to try to keep your credit utilization as low as possible.
Keeping your accounts open can prove a longer credit history, while closing them automatically shortens your credit history.
Review your credit reports
Reviewing your credit reports is important because errors can affect your score. Your credit report may contain incorrect personal information, incorrect accounts due to identity theft, inaccuracies in account status (such as closed accounts reported as still open), balance errors or data management.