building credit score from scratch

Building Credit from Scratch

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Building credit is kind of a catch-22. Lenders usually want to lend to people who have a proven credit history, but how can you build a credit history if lenders don’t always want to extend credit to you? Luckily, there are some common and simple ways you can choose from to start building your credit.

If you don’t currently have a line of credit history, one of the first places many people start is to apply for a credit card. But not just any credit card will do. The best cards with the lowest rates are typically reserved for those who already have good credit, so you’ll likely need to start with cards that are easier to obtain even with little or no credit.

Don’t be surprised if these cards come with high interest rates and a low credit limit. This is common, especially for people who have little to no credit. But don’t worry — you’re not obtaining these cards as a means of financing a big purchase; instead, you’re just using them as a starting point to establish a credit history and to learn how to care for your credit long-term.

Once you successfully secure your first credit card, the next step is to begin using it properly. Having a credit card account show up on your credit history is a good start, but future lenders are more concerned about your credit use and whether or not you make payments on time. So you need to begin using the card so that you can establish a track record of usage and repayment.

The good news is that you don’t have to spend a lot of money or rack up debt to be successful. In fact, getting into too much debt, could derail you from your goals overall. Just make an occasional purchase and then pay it off in full each month. This ensures your card will remain active while you avoid racking up high interest charges. Over time, this good use of credit can go a long way in helping you show healthy credit behavior.

The real key to helping establish your credit score is to understand that it takes time. There’s nothing you can do that will miraculously give you excellent credit overnight. Instead, it takes months, even years, to establish credit that is more likely to have lenders willing to give you better rates and terms. That’s why it’s important to take the first steps in establishing your credit as early as possible. This gives you plenty of time to establish healthy credit behaviors and solid payment history that may benefit you down the road when you need to borrow money for a big-ticket item like a car or a home.

About the Author
A financial planner turned retirement planning specialist, Jeremy Vohwinkle has been writing about finance since 2006. He holds various FINRA licenses and has obtained the Chartered Retirement Planning Counselor designation from the College for Financial Planning.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

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