Why Building a Strong Credit History Matters

Many people assume that if they don't plan to take out a mortgage or apply for a credit card, they don't need to worry about establishing a credit history, but that's not true. While good credit is important when you want to get a loan or a credit card, it's also used to make other decisions, including whether to:

• offer you car, renter's, or homeowner's insurance and what to charge you for insurance
• rent you an apartment
• hire you for a job

The reason a strong credit history is important to insurers, landlords, and employers is that it provides information about how well you handle your financial obligations.

The Basic Steps to Building a Good Credit History

When you're just starting to establish a credit history, there are some factors lenders may consider to decide if you are credit-worthy, including:

• Bank account history: Open a checking and savings account. Avoid overdrafts and bounced checks.
• Employment and residence history: They're checking to see whether you can hold a steady job, move frequently, and pay your rent on time.
• Utilities: Lenders are looking for utility accounts (gas, electric, phone, cable, water, cell phone) in your name. Make sure you pay all your bills on time and in full.

The next steps in the process focus on getting credit and using it wisely.

• Get a retail or gas credit card. These are usually easier to qualify for than a Visa or MasterCard, for example. Only charge what you can afford and always pay your bill on time and in full to build the strongest credit history.
• Get a secured credit card. These cards are tied to the amount of money you have in your checking account or an escrow account the lender sets up. The money doesn't come out of your bank account like it would with a debit card, but you cannot charge more than you have in the account. Before you apply, check and make sure your payment history will be reported to the major credit bureaus. Secured cards may have high interest rates or fees, so shop around for the best deal.
• Apply for a small loan like a personal loan or student loan. Do not borrow more than you can afford and make all payments on time and in full. Compare loan interest rates, terms, and fees before deciding on a loan.

Keep Your Credit Score Healthy

Once you've established your credit history, it's equally important to keep it in good shape. In addition to paying all your bills on time, it's wise to keep any credit card balances low and pay them down as quickly as you can. You should also avoid getting close to your credit limit because this can lower your credit score.

Check your credit score and, if there are errors, dispute them in writing with both the credit reporting company and the lender that provided the incorrect information. Be careful when checking your credit score. The only free report is available through the government's Federal Trade Commission at annualcreditreport.com. 

This article is for informational purposes only. For personalized financial advice, you should contact a qualified financial advisor.