So you want to build credit but have no credit history? You have no credit history and can’t get a credit card. How do you build credit? I have heard this question several times recently, so I wanted to provide some advice. Pass this on to your kids, grandkids and friends if you have already begun your own credit journey.
Why You Want Good Credit
Think of credit as the trustworthiness that a lender has in you to repay them. Would you loan money to someone you didn’t trust? Probably not. FICO (Fair Isaac Company) started in 1956 to provide a numeric measure of a person’s credit worthiness. If you want to someday buy a car, a house to call your own or get a loan to start an entrepreneurial business, you likely will need money. If you have a history of responsibly paying back your credit on time and in full, it is much more likely you can get the money you need. If your FICO score is high, considered good or excellent (720+), you will enjoy the lowest interest rates and terms for your loan.
The Credit Rules to Live By
Only use credit cards or get loans for items that:
1) You actually Need. “Need” meaning items that you would buy with cash anyways; gas, groceries, utility bills and if still in school/grad, then tuition, fees, etc.
2) You have the cash in the bank to pay for what is charged on the credit card or the loan payments you owe. My kids know this one… Cards can be convenient but you only can buy want you can afford. You owe what you “swipe”.
3) You can pay in full, 100%, on time and every month. This is the single most important factor in building credit and a high FICO score. It will also save you from paying high interest rate charges and fees.
Ways You Can Start Building Credit
- Open your first starter Credit Card. Visa, American Express, etc. Many of these companies offer “student” credit cards if you are still in school or grad school.
- Get a Gas card. Shell, Conoco, Exxon, etc. Remember, this is only for what you need and would buy anyways- gas to get to work or school… not beef jerky and gum inside the “quickie-mart”.
- Become an “Authorized User” on someone else’s credit card. A Family member may allow you to do this, but hopefully with a watchful eye. This will help you build credit but beware to them; you are not legally obligated to pay for charges.
- Be a Co-signer on a loan. Need a car? Well those (affordable) car payments, paid in full and on time can build credit. Again, the main signer for the loan is legally obligated.
- Get Credit for the Rent you already Pay. Check out rent reporting services such as Rental Kharma and RentTrack. This will usually help build credit but not all credit scores take this into account.
What’s the best card?
It really depends. Check out WalletHub to review their top picks.
A few tips though. Typically it is best to avoid a card with an annual fee, however a low annual fee may be okay if you can pair building your credit with receiving reward points that you will benefit from, such as cash back, flexible point systems or airline mileage cards if you plan to travel often. If you are unable to obtain one of these traditional cards, you may need to start with a “secured card”, where you place a security deposit on the card.
Another tip: Check your Credit Report and Scores regularly. You are entitled to one free report every 12 months from each of the three credit bureaus, Experian, TransUnion and Equifax. So that is 3 free each year. Go to AnnualCreditReport.com to check your credit score.
Further questions about how to build credit or credit in general? Explore Experian’s site (one of credit agencies) or shoot me an email anytime. Luke.fields@raymondjames.com
To Wise Credit Use,
Luke Fields, CFP®
Any opinions are those of Luke Fields and not necessarily those of RJFS or Raymond James, and are subject to change without notice. Information provided is general in nature. Past performance is not indicative of future results. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.