Everyone needs credit, unless you have an extreme amount of money that you can purchase everything with cash, but even then, if you wanted to rent a car, apartment, boat, or opening a checking account you need to have some sort of credit that shows you are able to pay on your debts.
Here are some tips to help you start to establishing credit:
- Start with putting utilities in your name. For first time utility start-ups be prepared to pay a deposit. Some utility companies will also accept a “letter of guarantee”; this is comparative to a co-signer for a loan. If you default on your utilities, the guarantor pays the bill. So most people; if they can afford it opt for the deposit. Positive utility history does not show up on credit checks, but negative and delinquent utility history do.
- Apply for a secured credit card through a bank or credit union. A secured credit card works like a credit card and helps to establish credit. Secured credit cards work on a collateral basis. For example, if you place a $500 deposit, the credit card limit is $500. You are not spending the deposit, but if you miss a payment the bank will absorb the whole deposit and will report the delinquent payment to the credit bureau, which puts a negative mark on your credit. If you keep a good payment history, banks usually upgrade you to an unsecured credit card (no collateral deposit required). Check with local banks, some banks will refund your initial deposit with a secured credit card when upgraded to an unsecured card.
- Department stores are a great place to get a first time credit card. But be watchful, they usually come with a high interest rate (25% and up).
- Make all of your payments on time! This cannot be stressed enough. Well established credit takes years to build, but only one late payment to break.
Where is the Credit Score Recorded?
These scores combine to create your FICO™ Score
What is a FICO™ score?
A FICO™ score (Fair Isaac Corporation) is a number that is given to each person based on their credit history. Credit history is created by active loans, open lines of credit, insurance, and any other source of payment arrangements, as well as by payments made on time, or delinquent payments. A FICO™ score that is 700 or higher usually indicates that the person is very good about paying all of their bills on time. A lower FICO™ score 500 or below indicates new credit or bills have become delinquent and possibly gone to collections.
A FICO™ score is made up of 5 factors:
When deciding to use a credit card, make sure you can pay off the balance as soon as possible. Interest rates accumulate quickly. The table below shows how long it takes to pay off a pizza when using a credit card with 24.9% interest (the annual rate as of July 2015) and only paying the minimum balance. Let’s say the pizza is from Pizza Hut, and it costs $35.98 and with interest that payment is now $45.57, and the minimum payment is $10. This is how it will play out if you only pay the minimum amount until completely paid.
It is always better to pay as much as you can on a credit card if you are trying to build credit. It is a myth that paying off a credit card will hurt your credit.