Credit Counseling Service: How to Build Credit from Scratch

If you don't have credit already, start now! Not having credit is almost the same as having bad credit. You don't want either! I've met people in their thirties who have no credit, but think they have perfect credit because they've never had any debt, no car loan, never had a credit card, never purchased a house, never been through a debt management program. They can't have great credit, since they have no credit at all. Some people are afraid of credit, or don't understand credit, and so they have one credit card, but never use it. This card might even be "inactive" from lack of use. In that case, they might as well not have the card at all, since creditors have no way of determining an individual's credit trustworthiness. Even if you have no intention of needing credit or a loan in the future, things can change. The credit counselors at our credit counseling service advise that your credit report may be used by a potential employer, your insurance company, or even your utility company. Who knows who will be reviewing our credit reports in the future.

The reasons you do not have credit can range. You may be a college student or an older adult who, for one reason or another, has never established a credit identity. Take, for example, a woman in her forties who has traditionally worked at home. If the household credit cards, mortgage, and car loans are all in her husband's name, she won't have a credit identity — it's as if, to creditors at least, she doesn't exist. Even if she is listed on the account as an authorized user, it's on his credit, and may of may not help your credit. Now suppose she and her husband divorce, or he dies. In that case, she'll be without credit resources. Or suppose you had some credit a while back, but it went bad, and so while seeking help through credit counselors, further purchases were put in your spouse's name, because she had better credit. In this case, too, you would be without a substantial credit identity. Don't rely on things like consistent payment of rent or utilities. These items aren't reflected in a credit report unless there is a problem. In that case, they reflect badly.

Whatever your situation, if you don't have a credit identity, you will most likely be treated as someone with bad credit would, for example getting turned down for loans or, if you do secure them, getting slapped with high interest rates. Regardless of who manages the family finances in your home, establish credit for yourself. At some point, you'll need to rely on that credit for an important purchase.

Beware, however, of how you establish credit. College students, for example, are barraged by credit offers stuffed in textbooks and kiosks set up on quads across America. Bank research shows not only that you're loyal to your first card, but also that parents typically take a child's credit burden and handle the debt management when that child has charged beyond the ability to pay.

Here are ways that you can establish positive credit for yourself:

1. Show you're responsible. - Whatever credit you establish, show that you are financially responsible by paying more than the minimum due every month - ideally, pay the entire balance every month. Credit counselors are always reminding consumers that consistent payment history plays one of the largest roles in determining your credit score.
2. Use your credit card consistently. - Our credit counseling service suggests that once you open a credit card account, use the credit card consistently but responsibly.
3. Get a secured card if you have to. - Open a credit card that is secured, but reports as unsecured. The way the bank can do this is by making some of the credit line unsecured. You deposit a minimum amount, say $500, into a savings account or CD set up by the bank. The bank then freezes those funds, and gives you a credit card that equals the deposit. Provided you manage your account properly, after twelve months, you get back half your deposit, and after twenty-four months, you get back the rest. One benefit of having an account that is listed as unsecured is that it looks to creditors like a company has taken a chance on you, when in fact, you've prepaid some of the card. The benefit to the creditor is getting money to invest. If you don't have credit (or bad credit), and no one will issue you a card, a secure card is a great way to start.
4. Obtain an installment loan. - This is a loan that is paid off by installment, which is a set monthly amount. Typically, installment loans are opened for cars or major household items, such as a washing machine. Installment loans are good because you can't add to them. Making timely payments each month proves you are efficient with debt management.
5. Learn about VantageScore. - There is a new scoring system called VantageScore meant for people who have no credit. It measures things like how you pay your utilities and rent, and even how you manage your checking account, but it's not been tested yet, so credit counselors don't know how reliable it will be as a financial responsibility barometer. Find out more at www.vantagescore.com.