How do you build your credit history?
If you thought it takes years to build a credit history, you would be correct.
Credit histories take years to build. And months to destroy.
The good news is that if you are just starting your career and recognize that good credit is often the key to getting hired, renting an apartment, and getting the lowest interest rate possible on small purchases and eventually real estate, there are steps you can do to build credit over time.
Here are some tips on building good credit quickly.
Credit card companies have become increasingly flexible on how they offer cards to new applicants, especially younger people and students. The most common ways are to become an authorized user, which allows you to get your card and then piggyback on another adult’s card.
The second way is to apply for a secured credit card. To do this, you need to put down a deposit that is used against purchases. This is a good way for people with no or bad credit to boost their credit histories because credit bureaus have access to this payment history.
You can apply for a credit card at age 18 in most states, but be prepared to show that you have an independent income. To prove this, you may need pay stubs, an IRS return, or a list of liquid assets, depending on the credit card company. All this is needed to show you can repay any amount you charge.
If you don’t have this, Discover card recommends that you allow a parent, another adult, or your guardian to be added as an authorized user on their credit card. When your name is added, you can use the card, and if you keep your charges current that positive repayment history is included under your name.
As an authorized credit card user, your credit score relies on the primary card holder’s positive credit card history and it then becomes part of the new borrower’s history (provided both pay debts on time.) Younger people who become authorized users at a lower age build up their credit card history sooner. This is then reflected in a higher credit card score. Note that becoming an authorized user is different from being a co-signer to an account. Co-signing is dangerous since the primary user is liable for all charges made by the other person on the account.
Applying for Your Credit Card
This process has also been made simple. Applications can be done online, in person, or by mail.
To apply, most credit card companies ask applicants to provide their complete name, Social Security number, birth date, current address (and how long you’ve lived there), e-mail address, annual income, their current employer, and time on the job. Credit card companies say the fastest way to get a card is to apply online and provide all the requested information the first time.
Once you apply for a card, the credit card company checks with one or more of the three credit bureaus—Experian, Equifax, TransUnion—to verify your credit history. If you meet the card issuer’s standards, you can get a card in a week.
If you are denied, find out why. It may be due to a mistake on your credit history or because you have bad credit. This happens more often than people think. Over 25% of consumers have disputed an error on their credit report, according to Chris Shadle, a specialist in credit monitoring. Shadle also said “credit scoring errors are rampant” in the industry. If you find an error, you need to take steps to repair your credit, but this can take time.
The Best Cards for New Applicants
This list of top cards changes annually, but a leader in this category is Discover, especially with secured credit cards. This card is highly rated because it has no annual fees and rewards (2% cashback, for instance.) This secured card requires that you pay off the balance entirely every month.
Other cards that are good for beginners are the Pedal1Visa card, which looks at your banking history, has no annual fee, a cash-back feature, and a mobile interface. The Apple credit card is also good for beginners. However, they require a credit score of 600. If you have that score, the card has no annual fee, daily cash-back on purchases, and discounts on Apple products. Bank of America is also appealing if you have a good credit history. This card offers a cash-back bonus if you spend over $1,000, plus 3% cashback on some purchases. The Chase Freedom Flex card offers a bonus for purchases and cash-back for certain categories of purchases. It also has a 0% interest rate on purchases for 15 months and no fees.
New applicants looking at other credit cards should compare cards based on fees, features (such as, monitoring your FICO score), payment restrictions, cash-back programs, any 0% loan provisions, and what mobile apps are offered.
Beware of the Credit History Monitors
Most new credit card, mortgage, and other loan applicants, do not realize that in the Big Data Age, almost all of your financial habits, good and bad, are recorded and reported to some credit monitoring company.
Some companies track how many checks a person bounces, late payments, check fraud events, uses of fake identities, how many times a person has gone bankrupt, been involved in civil court actions, or been arrested. Any of these factors can find their way into a credit report, and since these are all negative events, they will only hurt your score.
Using new artificial intelligence and algorithms, these reports are also being used by car insurance companies to determine your insurance rate since the AI data shows that people who have a low credit score also have more accidents. Employers also use these reports to examine your background and personal financial history, especially if you are being considered for a job where you will handle cash or large payments.
Building and Improving Your Credit Score
New credit card users who want to get a good start in building their credit, can follow these simple steps: make small purchases and pay them off 100% each month or earlier in their entirety. This strategy is good for applicants who open a second card account to build credit. The key thing is to show some activity and pay it off 100% monthly.
For those with a longer credit history, the ways to improve your credit score are simple: pay bills on time and don’t get close to hitting your loan limit. The rule is to stay below 30% of your credit limit. This shows the card company you are restrained and can control your spending.
Another way to build credit is to open a secured line of credit from a credit union. You can then receive a credit card accompanied by a line of credit. This line of credit can then be used to pay off a credit card.
Some credit card companies, such as Experian, advertise a “credit card boost.” But while these claims are interesting, Experian says that average customers only get a boost of 12 points on their credit score.
The better way is to follow the standard suggestions. These include paying bills on time, using only 30% of your available credit line, reducing your balance regularly, never missing a payment, not owning too many credit cards and having too many open lines of credit, and asking for a larger credit line. Another key factor credit card companies like is predictability.
Being predictable means that the computer algorithms used to monitor anyone’s account look for small changes, such as charging for everyday expenses. However, large purchases can trigger a red flag, since you have made an unpredictable action.
Some negative credit-related events stay on your credit report for seven years, such as being referred to a collection agency. Late payments are all bad, but the shorter the late payment and the number of late payments all detract from your score. If payment is older than 150 days old, it will trigger a red flag alert.
Checking your credit report and finding mistakes is another way to accelerate the creation of good credit history. Many sites offer free reports, including www.annualcreditreport.com. If you discover a mistake on your credit report, take steps to correct it immediately. Thanks to the federal law, the Fair Credit Reporting Act passed in 1970, consumers can request their credit file once annually. They can also challenge any incorrect information these files contain.
The rules for disputing an error on your credit report are all spelled out at the Consumer Finance Protection Bureau. This site also includes a sample letter to send to the credit bureau. The key thing is to write all of the issues down, send them by registered letter and keep records of all correspondence.
Another source of bad credit is attributed to identity theft. This will only result in bad news, so it is important to check for these types of mistakes.