Building Credit from Scratch

money growthHow do I build credit from scratch?

Building your credit for the first time can feel a little like the chicken and the egg. You’re going to need to take out a loan or get a credit card, but you can’t qualify for a loan or get a credit card without some credit history.  So what do you do?

First, you’ll want to start with a bank account.  You don’t need a long credit history to open a checking account at your local bank. In fact, you may have one already.  Although though a checking account won’t necessarily help you build a credit history with the credit bureaus, that account may help you get your first credit card or loan from the same provider.  You see, if you already have a history of doing good business with the bank, they know you and value your business.  That existing relationship may carry some weight when it comes time to get your first line of credit.  That is a good first step, but if that’s still not enough, here are a few other things to consider.

Some banks offer credit cards for folks who want to establish, strengthen or even rebuild their credit.  These credit cards are called secured credit cards because you secure the amount you borrow with a security deposit.  In other words, you provide collateral by depositing money in an account with the bank, something the lender gets to apply a portion of, or all should you default on the loan.  Then, your credit line is equal to the amount you deposited.  You won’t be able to touch that money or use it to pay off your balance, and you will still have to prove to the bank that you have sufficient income to pay the credit card.  But, the good news is that the bank will be more confident that you’ll pay them back even without great credit, thereby allowing you to build or rebuild your credit.

Of course, you want to make sure that your lender will report all those on-time payments to the credit bureaus before you apply.  Most banks and credit unions do this, but some retail store cards, for example, don’t, so make sure to check ahead of time.  And if your payment history won’t be reported by the card issuer, you may want to keep shopping for a card that does.

Don’t apply for a bunch of different cards, though, because if you keep striking out, all those hard inquiries and declines aren’t going to help you build a score. In fact, they may make your nonexistent credit score worse!

Then, there are prepaid cards.  A prepaid card allows you to load the card with a cash amount ahead of time to spend later.  Prepaid cards are great for people who need a Visa or MasterCard to make a purchase and can be a terrific gift idea, but they won’t help establish credit.

Another way to build credit is to see if there’s, someone who might be willing to co-sign a loan with you.  This can be any adult who is credit worthy, including your parents or spouse. When someone cosines a loan, you get the benefit of their good credit history, and this may help you get approved. You can then build your own credit with a good history of payment on the co-signed account.  However, keep in mind that whoever co-signs the loan for you is taking on a really big financial responsibility.  In the event that you don’t pay, they will be responsible for paying back the debt. Therefore, it’s not something you should ask for lightly.

When you do get credit extended to you, it’s very important to keep managing it carefully.  Even after you’ve built a solid credit history, make sure that you keep the good habits you learn for the rest of your credit life. This will help you build a long, positive credit history that will eventually result in a really good credit score.