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9 ways to build a
killer credit score It's much easier to start from scratch than to repair black marks later on. Here's how to push the right buttons at the credit bureaus. By Liz Pulliam Weston Establishing a good credit history has never been as important as it is today. It’s not just that you’ll need good credit to get decent rates when you’re ready to buy a home or a car. Your credit history can determine whether you get a good job, a decent apartment or reasonable rates on insurance. One seemingly minor misstep -- a late payment, maxing out your credit cards, applying for too much credit at once -- can haunt you for years. If you’re just starting out, you have a once-in-a-lifetime opportunity to build a credit history the right way. Here’s what to do, and what to avoid. Check your credit report You’ll first want to see what, if anything, lenders are saying about you. That kind of information is contained in your credit report at each of the three major bureaus: Equifax, Experian and Trans Union. Credit reports are used to create your credit score, the three-digit number lenders typically use to gauge your creditworthiness. Lenders also may look at the report itself, as may the landlords, employers and insurance companies who use credit to evaluate applicants. Can you have a credit report if you’ve never had credit? Maybe. Somebody else’s information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open bogus accounts. If that’s happened to you, you’ll need to clean up your credit report before trying to apply for new accounts. The Federal Trade Commission has information that can help. Establish checking and savings accounts Here’s a basic step that’s sometimes overlooked by people seeking credit. Lenders see these accounts as signs of stability. Opening checking and savings account is also one of the few things you can do as a minor to start building a financial history. While you can’t get a credit card in your own name until you’re 18 and can be legally held to a contract, many banks have no problem letting you open an account. Many, but not all. If your bank balks, you need to either look around for another bank or consider opening a joint account with an adult. Understand the basics of credit scoring The most important factors in your score are: Whether you pay your bills on time. How much of your available credit you actually use. It’s essential that you pay all your bills on time, all the time. Set up automatic payments or reminder systems so that you’re never, ever late. All it takes is a single missed payment to trash your credit score -- and it can take seven years for the effects to completely disappear. You also don’t want to max out any of your credit cards, or even get close. Keeping your credit use to less than 30% of your credit limits will help you get the best possible credit score -- and should help keep you from getting over your head in debt, as well. Finally, you don’t need to carry a balance on a credit card to have a good credit score. Paying your bill off in full is the best way to keep your finances in shape and build your credit at the same time. Piggyback on someone else’s good credit The fastest way to establish a credit history can be to “borrow” another’s record, either by being added to a credit card as an “authorized” or joint user or by getting someone to co-sign a loan for you. Having a co-signer can allow you to qualify for loans you might not otherwise get. The loan will show up on your credit report and, if you pay it off responsibly, will help boost your credit score. If you default, however, you won’t be the only one who suffers. The co-signer has basically promised to make good on this account, so any delinquencies will show up on her credit report as well. Being added as an “authorized user” has its risks, as well, for you as well as the person giving you access to the card. If your father makes you an authorized user of his credit card, for example, his history with that account can be imported to your credit bureau file, giving you an instant credit record. If he has handled the account well, that reflects well on you. But if he hasn't, his mistakes would also become yours. Any late payments or other problems could make it harder for you to get future credit than if you’d established your history without help. Even if you trust the person adding you to the card, you may not be able to piggyback on his or her credit. Some credit issuers won’t report authorized users to the credit bureaus, particularly if the user is not married to the original card holder. If the point is to give you a credit history, the person who’s adding you as an authorized user should call the issuer and ask how (or if) your status as a user will be reported. Apply for credit while you’re a college student Credit experts used to warn college students away from those booths set up on campus by credit card lenders -- the ones that promise free stuff for signing up. It turns out, however, that there’s no easier time to get a card than while you’re a college student, said Gerri Detweiler, author of “The Ultimate Credit Handbook.” Lenders are willing to take risks with you that they won’t once you graduate, probably because they know that your parents’ willingness to bail you out will end once you get your sheepskin. You still have to exercise some caution, though. Look for a card with a low or nonexistent annual fee and low interest rates. For now, just get one: Opening a slew of credit accounts in a short period of time can make you look like a risky customer. Apply for a secured credit card If you can’t get a regular credit card, apply for the secured version. These require you to deposit money with a lender; your credit limit is usually equal to the deposit. You’ll want to screen your card issuer carefully. To be frank, there are a lot of bad guys in this particular niche of the credit world. Some charge outrageous application or annual fees and punitively high interest rates. Your credit union, if you have one, is a good place to start looking for a secured card. You can also check Bankrate.com’s list of secured credit card issuers. Ideally, the card you pick would:
Get a finance company card
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board. |
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