How to Build a Credit History

If you have no credit history at all.
While most would agree that misusing credit can be dangerous, you may not realize that having no credit, or what's referred to as a "thin" credit file can also be a detriment.

Having a thin or nonexistent file doesn't mean that a person has no bills or payment history; it simply means that there is too little data stored about you at the various credit bureaus with regard to credit accounts or inquiry history. Young adults and people new to the United States often have thin files, but they are not alone. Recent widows and divorcees may face an uphill battle as they may lack a traditional credit history. Even responsible investors and affluent Americans may have thin credit histories because they long ago paid off their mortgage and car loans and/or just prefer using cash versus credit cards and traditional consumer loans.

The good news is that it's never too late to start building a healthy credit file. If you suspect you have a thin credit file, apply for one or two credit cards and start to charge selectively. Charging a few small purchases here and there is one of the best ways to begin establishing your credit, provided you can pay them off and make payments on time. If you don't, late charges will accumulate. Late and missed payments can have a negative impact on your credit report as well as your credit score, thus making it much more difficult to get your credit established and qualify for larger loans, such as an auto loan or mortgage.

If you're in debt now.
You'll obviously want to get out quickly, which is sometimes easier said than done. It's best not to get into that situation in the first place. If you do need to reduce your spending habits quickly, you can start by canceling and destroying your credit cards, leaving only one for emergencies.

The most important thing to remember when establishing or repairing credit is to always make your payments on time, for all of your outstanding debt (including those canceled cards). Don't let credit card or loan payments go into delinquency; this can make establishing credit more difficult. On-time payments are a display of responsible borrowing and work together over time to create a positive credit profile.

Once you have established good credit, it is important that you limit your credit purchases and loans to what you can truly afford. Though it's an easy thing to do, don't get out of control with your spending. Focus on paying all of your bills on time. Forming good credit habits early will ensure that restoring it will never become necessary.

If you are concerned about your credit history, your local financial advisor may be able to help.