For most of us, the requirement for a strong credit history is unavoidable. A good credit history is essential when it comes time to purchase a vehicle or a house, rent an apartment, open new utility accounts, get a mobile phone, or manage other financial operations. Credit cards are often used as the initial step in building a credit history for many people.
Fortunately, obtaining and utilizing revolving credit products accounts for just a minor amount of your credit score (credit cards).Consumers who are unable or unwilling to get a credit card might create a credit history in other ways.
Understanding Your FICO Score
Your FICO score is based on the following:
- Payment history: 35%
- Credit usage (the amount outstanding divided by the total available credit): 30%
- 15% account age/length of credit history
- 10% for new accounts/hard enquiries
- Credit mix/credit type used: 10%1
Another consumer credit rating system, VantageScore, employs comparable factors in a slightly different methodology devised by three credit reporting companies (Equifax, Experian, and TransUnion).2
Clearly, the most significant criteria are developing a track record of making on-time payments to all creditors and keeping debt modest in comparison to the amount of credit accessible to you (known as the credit utilization ratio).1
Keep Paying Old Bills
That old college loan may seem like an albatross around your neck, but years of on-time payments and the account’s age will raise your credit score. A good-standing account counts against your score for 10 years after it’s paid off and closed, so don’t skip payments or pay late. 3
Pay off collection accounts as well, because the most recent version of the FICO score disregards paid collections (but seriously dings your score for unpaid collections).4
Report Your Rent
Reporting rental payments is a wise choice for people with subprime or bad credit. According to an Experian research, adding rental history made customers with “thin” credit files (not enough data to establish a score on) scoreable. Many people rushed right to prime credit. Additionally, clients with existing credit scores saw their ratings jump by an average of 29 points. 5
This is why: Payment history and account age account for a substantial component of the consumer credit score. Customers who consistently make on-time mortgage payments get both sorts of points. However, in this situation, responsible renters have traditionally been at a disadvantage. While evictions and collections may do significant harm, a responsible rental history gave little or no credit advantage until recently.
The world has changed. Rent payments (when reported) are now included in the consumer credit file by all of the major credit reporting agencies. Rental payment history is not incorporated into FICO scores, although it may be recorded in a landlord-only credit report. The VantageScore includes rental history, which may enhance the consumer’s credit score within one month. 6
Consumers are unable to record their own rent. The landlord or property management may report directly to the credit bureau, or the renter can join up with a third-party rent reporter. Rental Kharma and RentReporters are among these firms, as are ClearNow, RentTrack, and PayYourRent, three rent reporters that work with Experian RentBureau. 7
Take a Loan
Borrowing money and repaying it on time is one approach to demonstrate that you’re a solid credit bet. Most loans are recorded as installment accounts, and credit bureaus want to know that you can manage one properly. 8
Ask your bank for a modest personal loan. If you are unable to get a standard unsecured loan, you may be able to obtain a loan secured by collateral, such as cash in a Certificate of Deposit account that you cannot remove while the loan is outstanding.
If banks are unavailable, several peer-to-peer lenders, such as Prosper and Lending Club, report to credit agencies and have greater acceptance rates than banks. 910
Open a Store Credit Account
Many retailers provide credit accounts. The majority are listed as revolving credit, which is the same as a credit card. Home Depot provides project financing. 11 Many local home improvement businesses also offer credit accounts, and some require a deposit in place of strong credit. Staples offers many credit options, including a personal credit account managed by Citibank. 12 Check to see whether the seller reports to credit bureaus before applying for store credit.
Also, bear in mind that certain credit cards are better than others for persons with bad credit, while others might help people improve their credit.
Check With Your Utility Company
Most energy companies only report negative information to credit agencies, but if you reside in Detroit and pay your bills on time, you’re in luck. DTE Energy discloses both good and bad payment records. Customers that pay their invoices on time benefit from good financial management. 13
Not in the Detroit area? Check with your utility provider to see whether they report to credit agencies, and if they do, place the bill in your name. If not, you might still benefit from your excellent payment history. Most utility companies would gladly issue a letter of recommendation for a current account holder.
Employment does not affect your credit score, but it does appear on your credit report. Some creditors (mortgage lenders, for example) need a steady job history before approving a credit application.
The Bottom Line
The careful use of credit products leads to healthy credit. If you want to create a strong credit history and credit score, you can’t avoid credit totally (which are not the same thing).As a result, customers who desire to improve credit may find it essential to acquire a credit card at some point. A secured credit card may be used until the user is able to qualify for a standard card (again, be sure it reports to the credit bureaus).Remember that although credit cards might assist increase your score, credit card debt is never essential to develop credit. As usual, keep an eye out for mistakes in your credit report and take use of free credit score services to know where you stand with the credit agencies.
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