Building Credit for the First Time

Wondering how to build credit from scratch? Worried you haven’t started building credit yet? Here are a few tips on what you need to know to build good credit for the first time. But first:

What is Credit?

Credit is basically a loan of money, and comes in many different forms. Credit cards are among the most common types of credit offered to consumers. What kind of credit card you can get will depend on your credit score. The higher it is, the more creditworthy you are in the eyes of lenders.

Understand How Credit Works

Your credit report is a record of how you’ve managed your debts. Do you make payments on time or are you always late? Are your credit cards nearly maxed out? Have you missed a student loan payment? All of this information is available in your credit report.

Banks, credit card companies and other companies you do business with report your payment history to one or more of the three major credit bureaus (Experian, TransUnion and Equifax). That information goes into your credit report. Based on the information in your credit report, a three-digit credit score is generated. There are several different credit scoring models, and each one calculates your score in a slightly different way, but no matter what model is used, the credit score represents how creditworthy you appear to lenders.

When you apply for a credit card, loan or other form of credit, the creditor will check your credit report and pull your credit score. The higher your credit score, the more confident creditors will be that you can pay them back. If you have a poor credit score, however, you may be denied credit or offered credit on more onerous terms, such as a higher interest rate.

Get a Credit-Builder Loan or a Secured Loan

A credit-builder loan is exactly what it sounds like — its sole purpose is to help people build credit.
Typically, the money you borrow is held by the lender in an account and not released to you until the loan is repaid. It’s a forced savings program of sorts, and your payments are reported to credit bureaus. These loans are most often offered by credit unions or community banks; companies like Self and Kikoff offer versions of them online.
Another option: If you have money on deposit in a bank or credit union, ask them about a secured loan for credit-building. With these, the collateral is money in your account or certificate of deposit. The interest rate is typically a bit higher than the interest you’re earning on the account, but it may be significantly lower than your other options.

Pay Your Bills On Time And in Full

Payment history accounts for just over a third of your credit score. Credit scorer FICO recommends that you always pay your bills on time to avoid late fees and negative marks on your credit report. While credit cards and loans almost certainly appear on your credit report, other billers, such as utilities and cell phones, sometimes report payment histories too (especially if you’re late paying). So paying on time is important for all your bills.

Ideally, pay off the balance in full each month to avoid paying interest charges. But if this isn’t possible, be sure to pay at least the minimum amount required every month. And if you can pay a little more than the minimum, it can save you on interest costs in the long run.

Be Patient

A good credit score doesn’t happen overnight. In fact, the first account that appears on your credit report will need to be six months old before you’re eligible for a FICO Score. (Tip: The authorized user strategy may help you fast track qualifying for a credit score.)

However, if you stick with the process and earn good credit scores, the effort can pay off in the end. The lifetime value of excellent credit can be worth tens of thousands of dollars, and perhaps even more.