Posts Tagged ‘no credit history’

Do you have “clean” credit but wonder if your credit score could be higher? Should you take out loans to help your credit score, and if so, how many?

You’ve probably heard how important it is to build a strong credit history. Unfortunately, there’s no way to get a “good” credit score just by paying cash. You need long-standing, satisfactory credit accounts on your credit report in order to have a hope of improving your credit score.

Why are your credit history and score so important? Your personal credit history is a measure of your financial trustworthiness. Good credit means it’ll be easier for you to get loans, credit cards, home mortgages and low interest rates. And low interest rates usually results in lower monthly payments — saving you lots of cash. So, clearly, having solid credit is a big deal, and having poor credit can be a costly problem.

Most banks and other credit grantors use a credit score to predict whether you’re likely to repay a loan and make timely payments. This means they take your credit application and pull your credit report to learn things about you, like your annual income, overall debt, payment history, and the number and types of credit accounts.

Many people just have a chicken-or-egg problem: They have little or no credit history, but it’s difficult to get credit in order to build that history! Establishing a good credit history usually isn’t as difficult as it seems. Consider these options:

• Apply for a store or gas credit cards, since these retailers are usually more willing to issue credit to someone with no history. If you pay these bills on time, then major credit card companies will probably issue you a card down the road.
• Look for “secured” credit cards. Essentially, secured cards require you to put up cash that you borrow again. These are pretty easy to get, if you have the money, and will help you build a positive credit account.
• Find a co-signer. You can ask other people who have an established credit history to co-sign on an account. By co-signing, though, the other person agrees to pay back the loan if you fail to.

How many loans or credit cards should you take out to help your credit score? That’s a question that depends on a lot of factors, but most people should avoid opening more than a few accounts in a short period (within six months). Over time, you will want three or more long-term credit accounts in good standing on your credit report in order to have a chance at a good score.

Once you start to build your credit history, be patient, as it will take many months, even years, to get into the better credit brackets. Make sure you pay your bills on time, and don’t open too many accounts at once.

Are you someone who does not believe in using credit cards? You’ve probably heard that it’s important to build a strong credit history. Is this true, or can you get a good credit score just by paying cash, building up a nice savings account and having no negative credit history?

Unfortunately, if you’ve paid cash your entire life or have no credit history, you may not have "good credit" in the eyes of lenders or banks.

Now, whether that matters depends on your life goals. But you need to have a substantial credit history if you ever want to buy a house or get a car loan. And even if you can get credit, a poor credit history will cost you thousands of dollars because you’ll be saddled with higher interest rates on your loans.

Even if you’re very responsible with your money, you could be surprised to discover that there’s little reward when it comes time to buy a home or lease a car. The reason is that lenders like banks make credit decisions — and determine your interest rate — after assessing your risk. They do so by examining your credit report or credit score. Your three-digit credit score is used to determine your credit worthiness for nearly all applications for credit, insurance, rental units, and even utility companies. Credit scores were designed to predict the chances that you won’t pay your bills in the future. Scores are based on payment history, amounts owed, length of credit history, mix of credit, and new credit.

So if you always pay cash and have no — or very few recent —credit accounts, you may have a lower credit rating than you imagine — even if you have a very high income and have never been late paying a bill. You’d think that paying cash for everything shows that you’re financially responsible, but the credit risk system doesn’t work that way.

Building Your Credit History

The good news? There are a number of legitimate ways to build up a solid credit history over time (none of them involve paying someone to "boost" your credit score or other such trickery). They include obtaining credit cards or store charge cards (there are "secured" cards for those who don’t qualify), getting listed as an authorized user on someone else’s card, getting a parent or guardian to co-sign, and getting utility service. There are also credit unions or banks that have programs to help people establish their credit.

When you’ve always paid cash, the best strategy to prepare for your long-term financial needs involves three basic steps: start building your credit history long before you need it; be patient; and, of course, pay your bills on time.