How to Build Credit From Scratch

More young adults, spooked by the financial crisis that started in 2008, are spurning credit cards, according to recent reports.

But while they are avoiding heavy debt, some are also failing to establish credit. Your credit history and score can determine how much you pay for loans, insurance and sometimes whether you can get a job. Using credit cards prudently is a way to show you are a reliable borrower.

The value of credit

 At some point in your life, you will likely benefit — or suffer — as a result of your credit history.

Landlords, car dealers, utility companies, employers, insurance companies and lenders of any kind will check your credit.

And because you weren’t born with good credit, you’ll have to build credit from scratch. 

Even if you have no credit history, you may be able to obtain an unsecured credit card by using a co-signer, such as a relative or friend who is willing to take on the risk of paying back the lender if you default.

You may also be able to build your credit by paying your rent and utility bills on time. Another option is to apply for a secured credit card. You make an upfront payment equal to your credit limit. The lender holds on to your deposit in case you fail to make payments and returns it when you close the account.

Credit report vs. credit score

These terms are different but related. Credit reports detail your credit history. Equifax, Experian and TransUnion are the big credit reporting agencies.

The reports contain your personal information, including your address and Social Security number, and list the type of credit you’ve used, when you opened a loan or line of credit, the balances and available credit on credit cards or other lines of credit, and bankruptcy records or debt collection actions.

Your credit score — a three-digit number between 300 and 850 — is derived from this data. There is more than one credit-scoring formula, but the FICO score is one of the most widely used.

Your credit score is the “go to” number lenders and others look at to predict how likely you are to meet your obligations. It helps lenders decide whether to do business with you at all, and on what terms. 

Your score will increase if you pay your bills on time and restrict your credit use to no more than 30% of your credit limit. Lenders reward borrowers with high credit scores by offering them lower interest rates and penalize those with lousy scores.

It’s also worth remembering that credit unions like iQ Credit Union typically offer lower interest rates for credit cards and for other loans than traditional banks.

Look for errors

Federal law requires each of the big three reporting agencies to provide you a free copy of your credit report, at your request, once every 12 months. Check them for omissions and errors.

Under the law, both the credit reporting agency and the person or organization that provided dubious information must correct their mistakes. So if you discover errors on your credit reports, it pays to dispute them.

It’s probably good that some millennials aren’t interested in becoming indebted like their parents were — or perhaps still are. But considering the power of good credit, it’s worth establishing, slowly but surely.

Peter Lewis, NerdWallet

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