Starting From The Bottom: Building Your Credit From The Ground Up

October 26th, 2013 | by Jon H
Starting From The Bottom: Building Your Credit From The Ground Up

At 18, most kids have no debit or credit cards, bank accounts, or bills in their name. When you are young you must start strong to build a credit history. According to the Consumer Financial Protection Bureau the following comprise your overall credit history: making on-time bill payments, avoiding loan default, the number of accounts you have, recent credit activity, and whether or not you have collection records and how old they are.

Building a solid, favorable history will become an advantage when it comes to getting financed for cars, homes, apartment rentals, unsecured loans, hooking up utilities, obtaining cell phone service, and more. However, there may be times when you simply cannot pay a lender. The key is knowing how to overcome credit score disparities and ensure than any case of default is isolated and not a pattern.

Starting From The Bottom: Building Your Credit From The Ground Up

Get Educated

Know what your credit score is. This number ranges between 350 and 850 and is reported to the three major credit bureaus: Experian, Equifax, and TransUnion. A lower score denotes a greater credit risk, potentially leading to loan denial or unfavorable interest rates if a loan is approved. A higher score gives you more access to credit with better terms and rates. You should check your score at least once a year because the bureaus provide one free report every year. Also, if you are denied credit, you can obtain a free report from whichever bureau the lending institution used.

Use Credit Cards

Everyone has a debt-to-credit ratio that pertains to how much credit is at their disposal versus how much credit is being used. For example, if you have a $1000 credit line, only use a maximum of 25 percent, or up to $250, of that available credit. When the minimum payment is due every month, paying a little extra when you will help build a good credit history.

Secure Credit

A secured line of credit is one of the best ways to repair damaged credit. Since most lenders will not give you unsecured funds with a low score, you can place a cash deposit and use this card like a normal credit card. This money is seen as collateral in case you default on your payments. Be sure this is not a prepaid debit card. You want the lender to report to the three credit bureaus every month.

Once you have a solid reputation for paying your bill, you may qualify for a line of unsecured credit where you don’t have to use your cash as a deposit. The downside is that there are almost always annual fees associated with a secured line of credit. You should look for institutions that require a $50 annual fee or less and do not have other fees like monthly maintenance fees, customer service help fees, etc.

Pay Bills on Time

Always pay your utilities, cable, phone, car payments, and insurance payments on time; this counts for one third of your score. Missed or late payments are reported to the credit bureaus usually 30 days after default and will be a negative mark on your report. If you experience a life-changing event such as a job loss, illness, family emergency, or anything that does not permit you to pay a bill, always call your lender and work out a deal. Most financial institutions will help you set up a payment plan because they would much rather get their money over a longer period of time than send your information to collection agencies.

This article was provided by one of my writers, Jennifer Chang, recent business school graduate who’s working on building up credit of her own. If you’re interested in more credit-related information, Jennifer recommends visiting