5 Ways to Build Credit from Scratch

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credit cards, credit management, credit report, credit scoreIf you just turned 18, it’s time to start thinking about credit and your financial future. Your credit report will affect almost every important financial move you’ll make, including buying a home or car. It may even affect your chances of getting a job, as employers can check your credit report during the hiring process.

The good news is you have a clean credit slate and the chance to start off on a positive note, establish good credit and keep it there.

[Free Resource: Check your free credit report and score]

Five tips to help you build credit from square one

1. Open a credit card account.

If you’re able to qualify for a new credit card, make sure to keep your total balance low enough so you’re able to pay it off each month.

Your “payment history,” or how reliably you pay your bills on time every month, makes up about 35 percent of your credit score. Since you’re building credit from scratch, you have the opportunity to create a flawless payment history. That’s why it’s smart to keep balances low, at least at first. Starting slow and creating good credit habits early on will help you establish a solid credit score in the short-term and also maintain a good credit rating in the long-term.

If you’re unable to open an unsecured credit card (that’s the “standard” type of credit card) because you don’t yet have a credit history, don’t fret! Another avenue for establishing credit is a secured credit card. A secured credit card is just like an unsecured credit card, only you put down a security deposit up front to provide assurance to the bank or creditor that any debt you take on will be paid.

Because a secured credit card has built-in safety measures – for both you and the creditor – it’s a great option for many people who are just getting started with credit. And just like a “regular” credit card, a secured credit card will help you build credit, provided that you make all your payments on time.

2. Pay your bills on time every month.

It may seem simplistic and redundant, but paying at least the minimum payment (the minimum amount you’re required to pay) on time every month is the most important thing you can do to build and maintain a good credit score. Period.

3. Be patient.

You may have to wait about six months after you’ve opened your first credit account before there’s enough credit information on you to tabulate a credit score.

4. Check your credit report every six months.

So you’ve opened a new credit card and paid each bill on time every month for about six months, now what? Check your status! Find out what exactly is on your credit report, what your starting point credit score is and check back about every six months or so.

It’s also important to exercise a bit of caution when you check your credit report online. There are a lot of “free” credit report sites out there littered with catches and gimmicks. Make sure you choose the real deal. The only website that gives you both a totally free credit report and free credit score, no strings, no trial subscriptions, no credit card required, is Quizzle.com.

5. Only apply for credit you need.

To start, one credit card should be sufficient. Prove to yourself that you’re able to keep the balance low on your one credit card and pay the bill on time every month before you consider opening up other credit cards.

If you feel like you’re ready to take on more credit, you may want to consider calling your credit card company and requesting a credit limit increase instead of opening a new credit card. Your request may be denied until you show them you’re able to manage your credit responsibly. Ask the customer service representative if they can tell you about how long you’ll need to wait, assuming on-time payments, until you’re eligible for a credit line increase. Set that time frame as your goal and continue to exercise steps two through four.

[Free Resource: Check your free credit report and score]

You have an opportunity here in that you’re starting from scratch. You have the choice to build a solid foundation for a credit history, which will open the door to the best interest rates and lowest payments on homes, cars and personal loans, or to ignore this privilege and responsibility, potentially damaging your credit score for many years to come and costing you a lot of money. Make the right choice! Years from now, you’ll be glad you did.

[Photo credit: http://www.flickr.com/photos/rashdan/ / CC BY-NC-ND 2.0]