A similar situation is that of that of obtaining credit for the first time. Just as with the job and experience conundrum, you find that you can't get credit without a good credit history, yet it takes obtaining credit to establish that good history. While this seeming catch-22 appears unanswerable, there are things you can do to establish a good credit history. The key is to get the ball rolling with a series of simple steps.
To begin, you want to be able to demonstrate to potential lenders that you are stable and trustworthy. A good start is obtaining a job and remaining with the employer for at least several years.
If you don't already have them, you might want to consider opening both a checking and savings accounts. Doing so highlights the fact you have an account to pay bills with and that you are serious about creating savings for your future.
Another important step is creating a track record of paying your bills on time, which can be done by establishing utility accounts in your name, such as phone, water, gas, electric, etc. The one catch here is that many utility companies require a credit check. Back to square one? Not quite, but you probably will be forced to pay a deposit, which can easily run north of the century mark for each service.
Additionally, you're going to want to request a copy of your credit report from all three reporting agencies (TransUnion, Equifax and Experian) to see if they've established a credit file on you. If so, you will want to review the file to determine if the information they have is in fact accurate. According to Steve Brown, a credit consultant from Denver, Colo., accuracy is a big problem when it comes to credit reports. "The 'big 3' reporting agencies maintain files on roughly 90 percent of all American adults," says Brown. "What's scary are the estimates that roughly eight in 10 reports have serious errors or other mistakes of some type." He cautions that it is ultimately up to the consumer to make certain the reporting agencies get their information right.
Once you've taken those first steps and ensured that what is on file in your credit report is accurate, you can move on to more proactive measures that will help expedite your credit building process. Among your choices:
• Apply for an unsecured credit card
• Apply for a secured/pre-paid card
• Apply for a credit card with the assistance of a co-signer
• Apply for a retail or gasoline credit card (easier to qualify for)
Whichever alternative you select, simply doing so ensures that a credit file with your name on it is created (if it hasn't been already) and thereafter updated each month. From there, building and maintaining a good history is simply a matter of adhering to common sense guidelines.
1) Pay your bills on time - this tells lenders they can count on you to meet your obligations.
2) Limit the number of cards you carry - while carrying just one may not do a lot of good, too many cards in one's wallet sends up a red-flag to creditors, with good reason. "Studies have shown that carrying too many cards can lead to the excessive use of credit and over obligation," notes Brown. "This is a real problem, especially given the fact that approximately 40 percent of financial problems are attributed to over obligation. As a rule of thumb, two to four cards should be more than enough."
3) Limit your number of requests for any type of credit - only take out credit when you really need it. Regularly seeking credit because it is available will eventually drive down your score and conveys a reckless attitude that both new and existing creditors do not like to see.
4) Never max out your credit limit - in fact, you should always try to keep your balance below 30 percent of your available credit line.
5) Don't just pay the minimums - not only will it take forever to pay off a balance in this manner, but you increase the risk that a card company will interpret such action as an inability on your part to pay more. In turn, they can use this as a valid excuse to jack up your rate due to the fact you might now be considered a higher risk.
If you do get yourself in trouble somehow and your credit history turns south, remember, you can improve your score over time. While you can't erase negative information if it is accurate (only time can), you can begin to offset it with good information. Just as with establishing credit history for the first time, you must take small steps that begin to paint a positive track record. Obviously, you must start by bringing delinquent accounts up to date and eliminating as much debt as possible before doing anything else. Once you've "righted the ship" and managed to bring your debt level down to something you can handle, you can then begin to take many of the same small steps necessary to building a positive credit history.