How Do You Build Credit from Scratch?

credit history is an important tool for many reasons. If you plan to apply for a loan for a home, car, school loans or start a business, your credit history is the tool that a lender will use to determine if you are a credit worthy borrower. Your credit report is a record of your payments. Timely payments will ensure that you have a good credit rating and delinquencies will give you a poor rating. Learning how to build your credit can be a challenge for many people. Until you build your credit, lenders will be reluctant to approve you for credit. Or, a lender may approve you for credit but they will charge you higher fees and rates to compensate for their risk.

Step 1: Get a Secured Credit Card

A secured credit card uses your cash as collateral. For example, they will lend $500 at the start and they require that the borrower deposit the money with the cardholder. Then they will provide you with a $500 line of credit and you can charge your card and pay it down over time.

The biggest benefit of a secured card is that they will report your payments to the three major credit bureaus. This can help to improve your overall history and provide you with good credit, but you will need to make sure that the payments are always made on time.

Step 2:  Retail Credit Cards and Gas Cards

Even if you have no credit history, credit cards issued by major retailers and gas companies can be easy to obtain. They carry high interest rates and low credit lines, however, they can be a simple and easy way for you to build credit. Again, be sure to pay the bill on time each month.

Step 3: Responsible Credit Management in College

If you are a full-time college student, there are credit card companies that can help you. You must be conservative and learn how to manage your debt, especially when you are new to it. Many college students spend more than they can and end up with a lot of debt. Be responsible and limit your cards and payments to a comfortable monthly payment.

Step 4: Pay All Your Bills On Time

Paying your bills on time will help your credit report rating. If you are building credit from scratch, be sure to make your payments your first priority. Your payment history will impact your credit rating, whether it's a utility bill or college loan. If you miss a payment, it can blemish your credit report for years. A good way to avoid forgetting about payments is to paying your bills electronically. Many banks use the auto-payment option. The biggest drawback is that you can forget how much money you have in your account, so be sure to keep track of all your payments.

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