The Need to Build Credit
If you do not have a credit history, lenders do not know whether or not they should give you money. Without any credit history, they can’t tell if you are a responsible debt-payer or a bad risk. You need to build credit in order to prove your creditworthiness.
Who Needs to Build Credit?
Anybody without a history of using credit needs to build credit. You never know when the need for a loan will arise, and it is a lot easier to get a loan with a solid credit history. Young adults who are just starting to learn about financial responsibilities need to build credit, and recent immigrants to the U.S. also find themselves without a credit history.
Ways to Build Credit
It is actually pretty easy to build credit. Try one of the following ideas:
- Ask your bank or credit union about a secured credit card. You can make a deposit to your account and have a credit limit in the amount of your deposit. The bank takes little risk and you build credit slowly (avoid Secured Credit Card Problems).
- Use a co-signer on your first few credit accounts. Lenders will consider the co-signer’s existing credit. The co-signer essentially ‘vouches’ for you while you build credit. Note that this is a big responsibility – you can cause major headaches for the co-signer if you don’t pay as agreed (see How Co-Signing Works for details).
- Use retailer programs for modestly large purchases like furniture. For example, you may buy a television on the “$40/Month Payment Plan”. Gas station cards may work as well. These programs can be easier to qualify for and they certainly help you build credit. Be sure that the retailer will report your loan to the major credit reporting companies.
- Get a credit card with any reputable institution that will give you one. Again, you have to make sure they’ll report your timely payments to the credit reporting companies. Of course, you have to always pay at least the minimum before the due date.
Risks of Building Credit
Remember that credit can be a useful tool, but it can also get you in trouble. After you build credit, you may be inundated with offers. Banks, credit card companies, and others will want to loan you money because they'll know you're a good borrower. Don't take them up on every offer -- only borrow money when it truly benefits you.
After you build credit, you need to continually monitor it. The US Government requires the credit bureaus to provide a free credit report to you annually, and you should take advantage of that right.