Building a Credit Report

You probably know that having good credit is important.  But what if you have no credit?  If so, you are not alone.  One out of 10 American adults don’t have a credit report with Equifax, Experian, or TransUnion.  Lack of credit may be an obstacle to getting a loan, a credit card, or other services.  Why?  Many businesses use credit reports and the scores calculated from them to make decisions about you.  Sometimes, reports and scores are a big part of the decision making. Here are some examples of businesses that use credit reports and scores:

  • Credit card companies use credit reports and scores to approve you for a credit card.  Your interest rate may also be based on this information.
  • Banks and credit unions may use your credit reports and scores to determine whether you can open an account (including savings or checking accounts) or get a loan.
  • Auto and mortgage lenders may use your credit reports and scores to determine whether you qualify for a loan. The interest rate and fees you pay may also be based on this information.
  • Landlords may use credit reports and scores to figure out whether they will rent an apartment to you.  They may also use this information to set your deposit.
  • Utility companies may use your credit reports and scores to decide whether you will have to pay a security deposit and how much that security deposit will be.
  • Cell phone companies may use your credit reports and scores to determine the plan(s) you qualify for.  People with poor credit reports and low credit scores may have to pay higher deposit or have to get a month-by-month, pre-paid phone plan.
  • Insurance companies may use your credit reports and scores (specialized for the insurance industry) to determine whether they will cover you and the premiums you pay.  Some states do not allow this practice, but others do with limitations.  To find out your state’s rules, contact your state insurance commissioner: http://www.naic.org/state_web_map.htm
  • Employers use a modified version of credit reports as part of their background checks for potential employees.  Between 50 and 60 percent of employers are estimated to use credit reports as part of the hiring process.
  • Professional licensing bodies may use your credit reports and scores as a factor in determining your eligibility to be licensed.

Requirements for a Credit Score

Credit scoring models reward both:

Diversity of credit.  To really boost your scores, you will need a credit card or charge card and an installment loan.
Length of credit.  This takes time.

To generate a FICO credit score, you have to have at least:

  • one credit account that has been opened for six months or more, and
  • one account that has been reported to one of the credit-reporting agencies within the past six months.

To generate a VantageScore, you must have:

  • One month of history and
  • An account reported to a credit-reporting agency in the past two years.

Credit Building Strategies

If you want to build your credit, consider one of these strategies:

Get a secured credit card. These cards are designed for people with no or poor credit.  To get a secured credit card, you must make a deposit with the bank that issues the credit card.  Often it is around $500, which is also the credit limit.  The credit limit is the maximum you can charge on the credit card.

Get a credit-building loan. Though there are different structures for these loans, generally they are small loans of  $1,000 or less that you repay through regular, scheduled payments over 6 months to a year.  Often, credit unions and banks require the loan to be secured with an amount equal to the principal of the loan in a savings account or certificate of deposit.  In some cases, the money you borrow is deposited into the secured account.  Your loan payments plus interest will be made directly out of this account. If you default on the loan, the credit union or bank will seize the deposit to cover the loan.

Become an authorized user on an account. This provides you with a credit card in your name, but someone else owns and is responsible for the account. You can use the card, and as long as the primary accountholder uses it responsibly and has good credit, it may provide a slight boost to your credit scores. FICO, the most widely used scoring model, has decreased the affect that authorized user status has on credit scores.This should be considered a secondary way to build your credit.

Pay all of your bills on time and as agreed. This is the most important strategy for building credit.  Over time, paying all of your bills on time and as agreed will build your credit.  But, you must have accounts that are generally reportable to a credit-reporting agency—loans, credit cards, and charge cards.  If you miss utility bills, rent payments, cell phone payments, payments for child support, parking tickets, and so on, these could also show up as negative entries on your credit reports.  And, they may make your scores drop.

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