Building Your Credit From Zero

Just starting out and don't have any credit? Follow our tips to building credit from the ground up.

Features
• Money & Finances: Banking • Money & Finances: Credit Cards
• Money & Finances: How-To • Money & Finances: Tips & Tricks

Full Description
You need a credit score for just about everything these days including utilities, apartment rentals, and jobs. It also often seems like you need a credit score just to get a credit score. If you've been turned down because of lack of credit history, follow these three steps to start building one today.

Start With a Secured Credit Card

While some banks and credit unions have looser standards than others, few will give a credit to someone with no credit history. This is because, unlike with a car loan or mortgage, there is nothing for them to repossess if you fail to pay your balance. Secured credit cards eliminate this risk for the bank. When you open a secured credit card, you also make a deposit equal to the amount of the credit limit. If you don't make payments, the bank will keep your deposit.

Because there is little risk to the banks, secured credit cards are very easy to obtain. Instead of worrying about whether you will be approved, worry about whether you're getting a good deal. While many banks charge an application fee or annual fee on secured credit cards, many do not. In addition, some banks may even let you participate in a rewards program. Finally, some banks will automatically return your deposit and convert the card to an unsecured credit card after a certain period of good payment history. Look for these features when you choose your card.

Build Good Habits Early

Building your credit for the first time is easy. Rebuilding it is not. Even a single mistake can destroy your credit score for years and make it next to impossible to obtain prime credit cards or get good loan rates. Most of building a positive credit history is common sense. Don't spend more than you can afford, and always pay on time. Even a single late payment can be highly damaging.

What might not be obvious is the need to watch your available credit. The amount of credit you're using accounts for 30 percent of your credit score. What's important to know is that it's calculated by your credit card statement balance. Even if you pay your balance in full each month, maxing out a credit card sends your score plummeting. If you're starting with a low credit limit, this can be pretty easy to do. Pay down your balance before your statement closing date to maximize your score.

Add New Credit Slowly

Lenders fear large amounts of new credit in a short period of time because it's a sign that you may be in financial trouble and desperately need the money. New credit also directly impacts your credit score as credit applications count for 10 percent of your score and the length of your credit history counts for 15 percent. When you start building your credit, you'll start getting offers for more credit cards and loans. Some will be good deals from reputable banks or major retailers while others will have high fees and predatory rates.

When you open your secured credit card, focus on using it responsibly for six months. At the end of that time, consider accepting a store card from a store you frequent or a credit card from the bank or credit union you already use. Go slow and add a new card once every six months to a year. Avoid the trap of opening too many store cards or other credit cards at once. You want to make sure banks won't think you already have too much credit when your credit score is high enough to apply for the best credit cards with the best rewards.
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