The 4 Keys to Great Credit
By Liz Pulliam Weston
Your credit history can make or break you when trying to convince lenders you're a good risk. Here's how to build the best record you can -- before you need it.
Getting credit when you don't have any -- or when you're recovering from a credit disaster, like bankruptcy -- can be daunting.
Without a good credit history, it's hard to get new credit. But without credit, it's tough to build a good credit history.
Tough, but far from impossible. Every day, people take steps that establish and improve their image in the eyes of lenders. So can you. Here's what you need to do:
Open checking and savings accounts
Having these bank accounts establishes you as part of the financial mainstream. Lenders want to know you have a checking account available to pay bills, and a savings account indicates you're putting aside something for the future.
Opening bank accounts is something you can do even if you're too young to establish credit in your own name. Until you're 18, you can't legally be held to a contract, so any credit you get will have to be through an adult -- either someone who co-signs a loan for you, adds you to their credit cards or opens a joint account with you. Having bank accounts, though, gets you started on the right path and gives you practice in managing your money.
Get your credit report -- if you have one
Next, you need to find out how lenders view you. Most base their decisions on credit reports, which are compiled by for-profit companies known as credit bureaus. You are entitled to a free credit report from each of the three major bureaus each year.
Typically, a credit report includes identifying information about you, such as your name, address, Social Security number and birth date. The report may also list any credit accounts or loans opened in your name, along with your payment history, account limits and any balances you owe.
If you're young or newly arrived in the United States, you may not have a report or it may have little information. If you've had credit problems, your report will list them.
Fix any errors or omissions
Some credit reports include errors -- accounts that don't belong to you or that include out-of-date or misleading information. You should read through each of your three reports and note anything that's incorrect.
Negative information, such as late payments, delinquencies, liens, and judgments against you, should be dropped after seven years. Bankruptcies can stay on your report for up to 10 years.
Once you have a list of problems, ask the bureaus to investigate errors listed on their reports. You can use the form that came with your report if you received it by mail, or use the Web link if you accessed your report on the Internet.
Add positive information to your report
The more information you can provide about yourself, the more comfortable lenders may feel extending credit to you. In addition, certain information -- such as having the same job or address for a few years -- can make you appear to be more stable in lenders' eyes. While this information isn't used in creating your credit score, it's often used by lenders in addition to credit scores to make lending decisions. You may also find that your report doesn't include credit accounts or other information that it should.
Here's a list of items to consider:
Are your employer and your job title listed? If you've had the job less than two years, your previous employer and job title should be listed as well.
Is your address listed and correct? If you've been there less than two years, is your previous address listed as well?
Is your Social Security number listed and correct? This is the way most lenders will identify you.
Is your telephone number listed and correct? Many lenders may not extend credit if they can't call you to verify information.
Does your report include all the accounts you've paid on time? Some lenders don't report regularly to credit bureaus, and some report to only one or two, rather than all three. You can ask the creditor to report the account to a bureau that doesn't list it. If the creditor refuses or doesn't respond, you can send a letter to the bureau with a copy of your latest statement and canceled checks to prove you're paying on time.
There are three common routes for establishing new credit:
Apply for department store and gasoline cards. These are usually easier to get than major bank credit cards such as Visa or MasterCard.
Consider taking out a small personal loan from your local bank or credit union and paying the money back over time. The bank may require you to put up some collateral -- such as the same amount you're borrowing, deposited into a savings account. But the loan, if reported to the credit bureaus, can still help build your credit history. Make sure that it will be reported before you borrow the money.
Apply for a secured credit card. These work something like the loan described above: You deposit a certain amount at a bank, and in return you're given a Visa or MasterCard with a credit limit about equal to the amount you deposited. You can find a list of secured cards at Bankrate.com. Avoid any card that charges a big upfront fee for processing your application or a high annual fee.
Once you've got credit, use it right.
Charge small amounts on each card -- but never more than you can pay off each month. You need to use credit regularly to establish your credit history, but there's usually no advantage to paying interest on those charges.
Once you've been approved for one card or loan, don't rush out and apply for several more. Applying for too much credit will hurt, rather than help, your score. Most people need only one or two bank cards, a gasoline card and a department store card, acquired over a year or more, to start a solid credit history.
Pay your bills on time, all the time. This includes household bills such as utilities and telephone as well as your credit card bills and loans. Late payments on any of these accounts can wind up in your credit report, and can really hurt your credit score, the three-digit number widely used by lenders to evaluate your creditworthiness.
Don't max out your credit cards. In fact, don't even come close. Try to avoid using more than 30% or so of the credit you have available to you -- even less, if you can. Your credit score measures the difference between the credit available to you and what you're actually using. The smaller that gap, the more it hurts your score. Lenders will worry that you're becoming overextended and won't be able to pay your bills if you charge too much.
Reproduced with permission of MSN Money.com, from The 4 Keys to Great Credit, Liz Pulliam Weston, 2007; permission conveyed through Copyright Clearance Center, Inc.