For most of us, having a strong credit history is unavoidable. A good credit history is essential when it comes time to buy a car or a house, rent an apartment, open new utility accounts, get a cell phone, or manage other financial operations. For many people, using credit cards is the initial step toward building a credit history.
Fortunately, obtaining and using revolving credit products accounts for only a minor amount of your credit score (credit cards). Consumers who are unable or unwilling to obtain a credit card might establish a credit history in other ways.
Getting to Know Your FICO Score
Your FICO score is determined by the following factors:
• 35 percent have a payment history.
• 30 percent credit usage (amount due vs. total available credit)
• 15 percent of accounts have been open for at least a year and have a credit history of at least a year.
• New accounts/complex inquiries: 10%
• Credit mix and type of credit used: 10%
Another consumer credit rating system, VantageScore, employs comparable factors in a formula devised by three credit reporting organizations (Equifax, Experian, and TransUnion).
Clearly, the most significant factors are creating a history of on-time payments to all creditors and maintaining a low debt-to-credit-limit ratio (known as the credit utilization ratio).
Continue to pay off old debts
Although an old college loan may feel like an albatross around your neck, years of on-time payments and the account’s age will help you improve your credit score. A good-standing account affects your credit score for ten years after it’s paid off and terminated, so don’t skip payments or pay late.
Pay off collection accounts as well, because the new FICO score ignores paid collections (but seriously dings your score for unpaid collections).
Notify Your Landlord
Reporting rental payments is a prudent decision for people with subprime or bad credit. According to an Experian study, adding rental history to consumers’ “thin” credit files (those with insufficient data on which to construct a score) made them scoreable. Many people went straight to the category of prime credit. Additionally, those with credit scores saw their ratings jump by an average of 29 points.
This is why: Payment history and account age account for a substantial amount of a consumer’s credit score. Both types of points are awarded to customers who complete their mortgage payments on schedule. Consumers who rent responsibly, on the other hand, have historically been at a disadvantage in this situation. While evictions and collections can be costly, a good rental history has delivered little or no credit benefit until recently.
The world has changed. Rent payments are now included in the consumer credit file by all of the major credit reporting agencies (where reported). FICO scores do not consider rental payment history, but it may be included in a specialist credit report issued to landlords. The VantageScore includes rental history, which can improve a consumer’s credit score in as little as one month.
Renters are unable to report their own rent. The renter can join up with a third-party rent reporter or the property manager or landlord can report directly to the credit agency. Rental Kharma and RentReporters are two of these companies, as are ClearNow, RentTrack, and PayYourRent, three rent reporters that work with Experian RentBureau.
Obtain a Loan
Borrowing money and repaying it on time is one approach to demonstrate that you’re a good credit risk. The majority of loans are reported as installment accounts, and credit bureaus want to ensure that you can manage one properly.
Request a small personal loan from your bank. If you don’t qualify for a standard unsecured loan, you may be able to get a loan secured by collateral, such as funds in a Certificate of Deposit account that you can’t withdraw while the loan is open.
Many peer-to-peer lenders, such as Prosper and Lending Club, report to credit bureaus and have greater approval rates than banks if banks are not an option.
Create an account with a store credit card.
Many stores allow you to open a credit account. The majority of them are reported as revolving credit, just like a credit card. Home Depot provides project financing. Many local home improvement stores also offer credit accounts, some of which can be obtained by paying a deposit in lieu of good credit. The office supply business Staples offers a variety of credit options, including a Citibank-managed personal credit account. Make sure the vendor reports to the credit bureaus before applying for store credit.
Also, keep in mind that some credit cards are better for those with bad credit than others, while others can help people get their credit back on track.
Consult your utility provider.
The majority of utility companies only report negative information to credit bureaus, but you’re in luck if you live in Detroit and pay your bills on time. DTE Energy keeps track of both positive and bad payment records. Customers that pay their bills on time get the benefits of good financial management.
What if you’re not in Detroit? Find out if your utility company reports to the credit bureaus, and if it does, put the bill in your name. If not, you can still take advantage of your good payment history. Most utility companies will gladly issue a letter of recommendation for a current account holder.
Keep your current position
Although employment does not affect your credit score, it does appear on your credit report. Some creditors (mortgage lenders, for example) require a steady employment history before approving a credit application.
The careful use of credit products leads to healthy credit. If you want to create a strong credit history and credit score, you can’t completely shun credit (which are not the same thing). As a result, people seeking to establish credit may find it necessary to obtain a credit card in the future. A secured credit card can be used until the consumer meets the requirements for a standard card (again, be sure it reports to the credit bureaus). Remember that while credit cards can help you improve your credit score, you should never use them to build credit. Always keep a watch on your credit report for mistakes, and use free credit score services to find out where you stand with the credit bureaus.