Getting started with credit is a bit like the chicken and the egg. No creditors want to give you a line of credit if you don’t have a great credit history. But you can’t have a great credit history without a creditor first giving you a line of credit. How can you possibly build your credit history without one of the two things happening first?
Unfortunately, building up your credit history quickly isn’t easy. However, good things in life are often now easy, but can still be done. Building up your credit history quickly can be done if you are willing to be diligent.
5 Tactics to Build Your Credit Report History Quickly
We will start by assuming you have absolutely no credit history at all. Fixing a credit history you have had for a while is a different problem. These tactics are for those that are just starting out and looking to build up their credit history.
0. Have a Healthy Banking Relationship
Step zero, you say? Absolutely. Before you can build a credit history you have to have a healthy relationship with a bank or credit union. Holding a checking account, savings account, or both with a financial institution is the first step. Using that account without running into overdraft charges and other signs of irresponsible behavior is a virtual requirement before they are willing to let you swipe to your heart’s content with an unsecured credit line.
1. Get a Secured Credit Card
One of the easiest ways to get credit when you don’t have a credit history is to apply for a secured credit card. If you have no credit whatsoever then you probably can’t get an unsecured credit card just yet.
A secured credit card works by essentially holding a deposit as your credit line. For example, a secured credit card company might let you open an account with them for a $500 deposit. They turn around and offer you a $500 line of credit. If you end up defaulting on the credit line then they have the payment already secured and don’t have to worry about writing off the debt.
Even though the initial credit line is small your responsible use of it will show other creditors that over time you can handle a bigger credit line. Usually after 6 to 12 months the secured credit card company will upgrade you to an unsecured card (if they offer that line of business).
To make sure you successfully kick off your credit history, you need to do the following with a secured credit card:
- Set up online access
- Set up automatic payment of the statement balance (not the minimum balance)
- Never spend more than your credit limit
One of the worst things you can do is end up with a delinquency on your young credit report by having a late payment or missing a payment. Taking the three steps above will greatly reduce the odds that you slip up and damage your credit history.
2. Get an Installment Loan
Your credit score is built on using multiple types of credit in a responsible manner. Having a different type of loan than a credit card qualifies as a different type of credit. This doesn’t have to be a massive mortgage or a huge car loan, although those count. You can get a small personal loan from the bank you have a relationship with at an affordable rate. You don’t have to use the money for anything, just stick the funds in a savings account and make several payments in a row.
3. Use Your Credit Lightly
One of the worst things you can do when you first get a credit line — secured or not — is to get overly excited and use a bunch of that credit line at once. You might think using a big portion of your credit line and making the monthly payments would show that you can handle the credit, but it actually does the opposite. A big piece of consideration for a new credit card application is your current credit utilization. Ideally you want to be somewhere in the 1% to 10% credit utilization range. That means if you get a $500 secured credit card that you shouldn’t carry a balance of more than $50 at a time. (You can spend $50, pay it off, then spend another $50 in the same month if you need to.) This keeps your credit utilization low, but still has you using the credit responsibly.
4. Get a Retail Store or Gas Station Credit Card
The next step is to try and get an unsecured line of credit, but don’t go straight to the big banks yet. Some of the easiest cards to get in terms of underwriting are retail store and gas station credit cards. Yes, the pimply-faced teenager cashier that offers you 15% off today’s purchase could actually help you build your credit report. These cards offer discounts and exclusive benefits to card holders, but that isn’t why you want the card. You just want someone that will extend a line of credit to you.
You may even get some bonus points or cash back for doing your shopping at that store. While it is beneficial to use the card — keeping in mind the less than 10% utilization rule — don’t overspend at one store that might charge a higher price than a store you don’t have a card with.
5. Keep Your Application Dates Close Together
Ideally you would apply for the secured card, loan, and retail store card on the same day. This is due to how inquiries hit your credit report. You want them to all hit on the same day rather than being spread out over several weeks. Each time a hard inquiry hits your report it temporarily drops you score 2 to 5 points. You want those to all hit at the same time, and the negative effects to hit all at the same time. This slightly increases the odds that you will be approved for all of the cards because your scores won’t have dropped yet.
Unfortunately, it may not be completely realistic to get the three different lines of credit all at the same time. You may have to start with the secured card and installment loan combination from your local bank or credit union first, then graduate to a retail store credit card before moving on to the land of unsecured credit cards.