The Best Way to Build Credit

Building credit is something almost everyone should think about. Your credit history can affect multiple areas of your life, from the interest rates you receive on mortgages and car loans to your ability to achieve gainful employment. Unfortunately, building credit takes time, and it can be difficult to get your foot in the door if you wait too long or allow negatives to build up on your credit report before you have any positives. Here are some good ways to build credit no matter what your circumstances.

Significance

Your credit report and score contain information about your payment history on loans, credit cards, utility bills and other items. This information helps lenders determine whether or not you are creditworthy and adjust the interest rates they offer you on loans and credit cards accordingly.

Features

Your credit score consists of several factors, including the length of your credit history, number of accounts, different types of accounts, number of negatives/late payments, age of negative items and credit utilization ratio. The exact formula for figuring your credit score is top secret, but your payment history and utilization have the biggest influence, along with the length of your credit history.

Time Frame

Building credit takes time. Since you cannot legally enter into a contract until age 18 in America, it is difficult to start building credit until you turn 18. Credit cards are generally very easy for young people to acquire while they are in college, and if used responsibly can be an excellent way to begin building solid credit. Keeping your oldest accounts open and in good standing is important, so unless you are worried about identity theft or have another excellent reason for closing old accounts, keep them open so they continue to contribute to your credit score.

Types

For young adults who are not in college or others with no credit history, credit cards may be somewhat harder to come by. Luckily, there are many other types of accounts that can help build credit, and having a variety of different types of accounts on your credit report helps your score. Car loans, mortgages, store cards, secured credit cards and cell phones/other utilities are all good ways to build your credit. Those who have no credit history may find it difficult to obtain low interest rates on loans, so procuring a store card, secured credit card or a cell phone (in your own name) first may help build your credit and allow you to qualify for lower interest rates on subsequent loans.

Considerations

Having a long credit history and multiple accounts is only good for your credit if you maintain an excellent record of paying your bills on time. Late payments will kill your score no matter what else you do to build it. The best way to repair a score that has been damaged by late payments is to allow them to age and eventually fall off your credit report.