It may seem logical to assume that since you have never taken out a loan, don't have a credit card and never even borrowed money from your relatives, you ought to have a perfect credit score. Unfortunately, it doesn't work that way. If you have no loan history, you don't have a credit score at all, which is a completely different animal than having perfect credit.
Credit Score Purpose
The purpose of a credit score is to provide lenders with a way to determine whether you'd be a good credit risk. If you consistently pay your bills on time, don't overextend yourself with credit and have been doing this for awhile, you are going to have a very good, if not near-perfect, credit score. This is important if you want to be approved for loans, get the lowest interest rates possible and, in some cases, to look good to potential employers.
How to Build Credit
A Catch-22 exists with credit scores. If you have no credit history, it's difficult to get a loan. If you can't get a loan, you don't build a credit history. There are ways around this, though. A secured credit card is one option. To get one, you deposit money into an account, which serves as your credit line. Once you start using the card, the creditor reports your activity to the credit-reporting agencies. If you use the card responsibly by paying back your bill on time and by not going over your limit, you start to build good credit. But, if you are irresponsible with your card, by making late payments, missing payments or trying to spend more than your limit, you'll wind up with a poor credit score. After you've proved that you can be responsible with the secured credit card, most credit card companies will let you have an unsecured card and will refund your deposit. Expect this process to take about 18 months.
More Ways to Build Credit
Another way to build credit is open a department store credit card or a gas card account. These cards are typically easier to get than a bank credit card. Check the interest rate on your department store card because those cards traditionally have high interest rates. Your best course of action when you use a department store card is to pay it off at the end of the month and not carry a balance. Make sure the gas card you get does not require you to pay it in full every month because those types of gas cards do not help your credit score any. Get the kind that you can carry a balance on. You don't have to carry a balance, but the revolving type of gas cards report to the credit-reporting agencies.
Achieve a High Score
When you start building credit, strive for a high score by paying your bills responsibly, but don't necessarily stress over-achieving perfection. The difference between a very high score and a perfect usually makes no difference in your life, according to Dana Dratch of Bankrate. A very high score gets the same low interest rates on loans as a perfect score. It's very rare for anyone to have a perfect score. In fact, Maxine Sweet, a vice president at Experian, has never seen it. The ways to get your score at its highest are to pay your bills on time, keep your balances low and only take new credit when you need it.
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