A good credit rating is important for many life activities, but how can someone without any credit history begin to establish a good credit rating? While not all lenders are willing to take a chance on a first-time borrower, there are ways to develop a credit history with some planning, patience, consistency in making payments, and a bit of time.
Check your credit report
Checking a credit report for someone with no credit history might seem like an odd notion, but we’ve all heard stories about identity theft, and thieves often use the social security numbers of children. By federal law, everyone is allowed to obtain one free copy of their credit report every 12 months from each of the three nationwide credit bureaus, Equifax, Experian or TransUnion.
If there are any errors discovered on the report, it is imperative to address them immediately. Once the report is in tip-top shape, it’s time to take some action steps toward establishing a credit history.
Types of credit cards
A secured credit card can be a good way to get started with credit. Typically, a lender will require a cash deposit to open a line of credit for the same amount. First-time credit card users typically pay $300 to $500 as a deposit for the privilege of carrying a credit card. Timely payments and modest, but regular use will help build a good credit history over time.
There are pros and cons to obtaining a store card typically including high interest rates and strict payment terms. However, store credit cards which aren’t co-branded by a large national bank can often be more lenient than large lenders when issuing cards, so they can be a good way for newcomers to credit to establish a positive history.
Gas cards can also be an easy-entry type of credit to obtain, with the added benefit of security while being on the road, knowing gas can still be purchased even if other funds aren’t at hand. Gas cards can also be beneficial to first-time credit borrowers because the types of purchases which can be made are limited to gas and in-store items, so the temptation to overspend can be greatly reduced. A combination of a store card and a gas card can be an excellent way to develop a credit rating and get accustomed to making payments on a regular schedule.
Points to remember
Regardless of which types of cards are being used, it is important to pay bills on time, every time. Be sure payments are mailed out at least a week to ten days before the due date so that payments are applied on time. It is also important to stay on top of the balances and not max out the cards.
Be careful about applying for too many credit accounts at once, as too much activity with reporting agencies can itself cause a credit score to drop. Sometimes, once a credit is established, offers for new credit cards will begin to flood in, and pitfalls can be hiding in those offers. Some will be cards with expensive terms, and opening too many accounts can create a high debt-to-income ratio, even if the balances aren’t high. The appearance of having access to too much credit in relation to income can also have a negative effect on a credit score.
Once some forms of credit have been obtained, it can be a good idea to continue to monitor the credit report at intervals. Consider a credit monitoring service to track the progress, especially if a major purchase such as a house is being planned.