How to build good credit?

[Dorothy]

Hi, I’m 22 just moved out, and was wondering how to build good credit?

[Tracy Winters]

Building good credit takes time and patience

Building credit takes time. You may see many advertisements promising to build or fix your credit history in a matter of days. Don’t fall for them. It’s only your money they’re after. The plain truth is that it may take years to build a GOOD credit history, and there are no shortcuts.

You must understand that good credit is more than just a good credit score. There IS a difference between the two.

While 90% of your credit score is determined by your credit activity from the past 24 months, your credit report includes information from the last 7 years. So in theory you may have a good score, but a lousy report.

When creditors pull your report, they look at much more than just your score. So if your report has derogatory items on it, you may find it impossible to get credit even with a good score.

So How to build good credit?
You need to take care of two different aspects of your credit report:

• If you have negative information on your report (defaults, Pay-Offs, Late Payments etc) – you must fix these items.
• You need to establish a stream of positive information (i.e. a steady flow of timely payments.

Fixing Negative Items
Negative items may or may not weigh down on your score. The older they get, the lesser the effect on your score. However, as explained earlier – you must fix them regardless of whether they will improve your score.

In fact, with old negative information, most likely that your score will remain the same. BUT, when a creditor checks your report, a paid collection or default (with a zero balance) looks much better than unpaid one.

Building Positive Information
With or without negative information on your report, you need to establish positive information. For that, you need to actually use credit.

Since it’s hard to establish credit with bad or no credit history, you have two options:

• Apply for and use secured credit cards.

  Secured credit cards are easy to get because the bank has a security in case that you default.

  You need to use the secured card for small purchases and keep paying the statements on time. Avoid carrying balances on the card. It’s better to pay the statements in full. Also, avoid using more than 35% of your available limit.

• Apply for a secured loan.
  Much like secured credit cards, secured loans are easy to get. Why do you need one? To diversify your credit types and establish another stream of timely payments.

Here are the 4 most important points of How to build good credit:

1. A steady history of timely payments (at least 2 years)
2. No derogatory items on your report
3. Low credit utilization (below 35%)
4. A healthy mix of credit types (installments, Revolving etc)

Lastly, read this list of Credit Building Do’s & Don’ts.

P.S. if you have an auto loan or a store credit card to add – go ahead. It will improve your credit.

[Author]

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