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Elise Huston of Flourish Wealth Management on WalletHub | How to Establish Credit in 5 Easy StepsSubmitted by Flourish Wealth Management on August 18th, 2017
by John S Kiernan, Senior Writer & Editor | WalletHub.com
In order to build a good credit score, you must first establish credit. Establishing credit means beginning your credit history by obtaining a loan or line of credit. That’s all you need to get your first credit report and score. And it’s the first step toward one day qualifying for a decent mortgage, car loan, etc.
So if you’ve had a loan or credit card — or your name has been associated with one — for at least a month, your credit should already be established. You can see for yourself by checking your latest credit score and report for free on WalletHub.
Below, we’ll tell you exactly what you need to do to establish credit.
1. See if You Have a Credit Report
The mere presence of a credit report in your name means you’ve already established credit. Perhaps you are or were previously an authorized user on a family member’s credit card account, for example. However, it could also mean that you have been a victim of identity theft or have a collections account in your name.
You can learn the specifics of your situation by signing up with WalletHub. Should you find a report tied to your Social Security number, carefully review its contents and dispute any errors or fraudulent accounts that you come across. You can also ask the credit bureau to remove negative records from a card on which you were an authorized user. As an authorized user, you are not responsible for any misuse of the account.
2. Open a Starter Credit Card
Credit cards are the best credit-building tools at our disposal. They are generally easy to get, and they all report information to the major credit bureaus on a monthly basis. As long as this information reflects responsible use (especially when it comes to on-time payments), you will not only establish credit but also begin to build a very solid track record.
Your top priority at this point should be to find a card that you can get approved for and does not charge an annual fee. This will help you establish credit faster, avoid unnecessary hard inquiries and save as much money as possible.
When choosing a starter credit card, you have three main options:
|Type of Starter Credit Cards||Details|
|Secured Credit Cards||Offer nearly guaranteed approval and make it impossible to spend more than you can afford to repay|
|Student Credit Cards||Tend to offer the best terms but require you to have an active college or university email address|
|Credit Cards for People with Limited Credit||Are somewhere between secured and student cards, offering decent terms and moderate approval odds to the general public|
Some people may be reluctant to open a credit card. And while it is possible to build credit without a credit card, loans are the primary alternative.
Any loan will require you to go into debt and lose money on interest charges. Many credit cards, on the other hand, can be locked away in a drawer unused while still helping you build credit.
3. Use Your Card Responsibly for 6+ Months
You can establish credit and get a credit score within a month of getting your first loan or line of credit. But that score will be based on such limited information that it could easily take a nosedive if you make a mistake early on.
So it’s very important that you make on-time payments and maintain reasonable credit utilization for the first six months or so. As a general rule, you should try to use less than 30% of your spending limit (or less than 10% for the best results). Careful budgeting and setting up automatic monthly payments from a bank account can be quite helpful in meeting these goals.
It’s also worth noting that responsible use of your first credit card can pay off in the form of a higher credit limit down the road. That, too, can help your credit score go up.
4. Check Your Credit Report & Score Often
Checking your credit at this point will tell you whether you’ve successfully established credit or have more work to do. Once your credit report and score become available, you’ll be able to gain a sense of how your initial performance was graded.
Your credit score is one obvious indicator. But credit scores are made up of several parts, and you can gather additional intelligence by reviewing ratings for each component of your score on WalletHub. We’ll tell you exactly what’s holding back your score and how to fix it. That’s important because it will allow you to change course before any problems take too big of a toll.
5. Build & Improve Your Credit
Congratulations! You’ve established your credit. Now it’s time to continue working toward lasting excellence and the savings that come with it. So if you’re ready to take things to the next level, check out our guides on how to build credit and how long it will take. After all, what you really want to do is establish good or excellent credit, and you need to build up to that if you want it to last.
If you are planning to apply for a new loan, line of credit, apartment or job that requires a credit check in the near future, you may also want to explore the various ways that you can improve your credit in the short term. Finally, if you want to learn what not to do, our articles on credit mistakes to avoid and the reasons credit scores can fall should prove enlightening.
Ask the Experts: Getting Established
It's important to make a good first impression. So to help you start your credit career on the right foot, we posed the following questions to a panel of personal finance experts. See who they are and check out their advice, below.
- Is responsible credit card use the best way to establish credit?
- Is it too hard to get credit without prior borrowing experience? Too easy? Just right?
- What is the best piece of advice you have for someone who wants to establish credit from scratch?
- What is the biggest mistake that people make when first establishing credit history?
Certified Financial Planner and Wealth Manager at Flourish Wealth Management
Is responsible credit card use the best way to establish credit?
Responsible credit card use can be a great way to start building credit. However, you want to be sure to make these payments in full each month and on-time, to establish good credit history. A way to ensure this happens is to set your credit card up for auto-pay, to ensure you do not miss a payment. It is also important to keep your credit utilization low. In general, this means only using about 30% of the credit available to you each month.
Is it too hard to get credit without prior borrowing experience? Too easy? Just right?
It can seem difficult to get credit history without prior borrowing experience, but there are ways to develop credit at an early age.
You can take out a starter credit card, student credit card or a department store credit card. This is a great way to start to develop credit history by making on-time payments.
In addition to building a strong record of paying credit cards on time, you can demonstrate the ability to handle debt by co-signing for a car loan with your parents before heading to college, or early in your twenties. Typically, people do not think about establishing credit until they need it.
What is the best piece of advice you have for someone who wants to establish credit from scratch?
The best piece of advice I have for someone who wants to establish credit from scratch is to make your debt or credit card payments on time, and make the payments in full.
I recommend requesting your credit report summaries from the three credit reporting agencies (TransUnion, Experian & Equifax) every year. You can request these reports for free each year and it will not affect your credit score. This will give you the opportunity to review your credit history and check for accuracy or potential fraud. We are seeing credit scores more available for free on diffeent sites, and from your credit card provider. This encourages consumers to be mindful of their credit score.
On average, it can take one to two years to build a good credit score, so it is important to start building credit at a young age.
What is the biggest mistake that people make when first establishing credit history?
One of the biggest mistakes people make when first establishing credit history is failing to make a payment on-time. One late payment will have a greater impact on your credit score early on, compared to a late payment after ten years of great credit history. It is also important to pay off the full balance each month. Each time you make the minimum payment only, you are accruing interest on the remaining balance. Typically, credit cards have the highest interest rates compared to other types of debt. A good practice is to determine what you need to purchase each month, and ensure these are items you can pay for, in full, when your credit card payment comes due. It is easy to use a credit card to pay for things we want, but people can run into trouble if they do not have the funds to pay the credit card balance in full.
Although the formula is not expressly known, it is important to consider the different factors that go into calculating your credit score. These can include payment history (on-time payments and payments made in full), credit utilization (percentage of available credit that has been borrowed), length of credit history (length of time each account has been open), new credit (amount of recently opened accounts) and credit mix (different types of debt). It is important not to close your oldest credit card account, or open a lot of credit cards at the same time, as these factors will all impact your credit score.
This article originally appeared on WalletHub.com, click here to read the orginal article.