How to Build Credit in Any Market

6 ways individuals can establish a positive credit history

SAN MATEO, Calif., Nov. 7, 2007 — In today's tight credit market, the idea of having no credit history seems almost as bad as having skeletons in a consumer's credit report closet -- but Brad Stroh, co-founder and co-CEO of free online consumer portal Bills.com (www.bills.com), reassures consumers that it is possible to establish a solid credit history.

"Most creditors look at an individual’s credit (or FICO) score, which typically ranges between 300 and 850, to help determine the likelihood that the person will repay debts," Stroh said. "If you do not have a credit score because you have not established credit yet, the good news is that you probably are not haunted by an array of unpaid debt. You can work to build good credit history - and your effort will pay off when your score helps you buy the car or home you need."

Credit scores are calculated based on factors including:

  • Repayment history — A history of not paying debts, or not paying on time each month, will lower scores.
  • Amount of credit used — Credit lines near their limits, or maxed out, negatively affect credit scores.
  • Amount of overall debt — Too much debt makes it less likely you could pay off additional debt. Too little debt offers creditors limited payment history, making it difficult to judge credit worthiness.

To start building good credit history, Stroh suggests these six tips:

  1. Understand your credit rating. Review your credit report for free once a year. Visit the Web sites of the three major credit reporting agencies (Equifax, Experian and TransUnion) or www.annualcreditreport.com, or call to request your report. The higher your credit score, the better. A score below 680 usually results in a borrower being charged a higher interest rate or denied credit. If the report includes items that are inaccurate, request the report be corrected.
  2. Give yourself credit. Build credit history by carefully using a credit card. Most Americans receive more credit card offers than they ever need, but if you are not getting these offers, consider taking out a gas card or a retailer’s store card. Then charge a few expenses that you are certain you can pay off in full when the bill comes. Pay the bill on time every month, and always pay in full so that you avoid interest charges. "Don’t think of a credit card as a financing source, but as a convenience," said Stroh. "If you cannot afford something, don’t charge it."
  3. Take a loan. Another good way to build credit history is to pay off a small loan. Borrow from your bank or credit union to purchase a used car or a larger purchase, such as an appliance. Pay the loan on time and in full. Pay any student loans on time every month. On-time payments are the No. 1 factor in determining a credit score.
  4. Build job history. A stable job history is another factor that lenders will consider when giving you a mortgage loan. Creditors look at job history to understand a consumer's stability and income.
  5. Create — and stick to — a budget. To make sure you stay out of debt, create or update a household budget. Many people fall into credit score disarray by spending beyond their means, building up debts, and maxing out credit cards. In budgeting, list ongoing monthly expenses (fixed expenses like rent or mortgage payments). Add variable expenses that are "must-buys" (food, gas, medicine). Leave two categories for savings and spending cash (for unexpected expenses and entertainment). Add monthly net income (the amount left after taxes and other paycheck deductions such as health insurance and 401(k) contributions).
  6. Protect yourself from identity theft. Identity theft is at an all-time high, and it can destroy credit ratings. Most identity theft occurs "offline," not through the Internet. Protect yourself from unscrupulous individuals who could go through your trash, steal account numbers online or get personal information through complex "phishing" scams. Record all important financial information and account numbers in a secure place. Shred all documents that contain personal information. Never give out personal information in e-mails or in a phone call you did not initiate.

"A credit history is a lifelong work in progress," Stroh said. "Everyone should start to build a good history as soon as they can. In the end, financial responsibility brings peace of mind -- and saves money on any future debt, such as mortgages and car loans."

Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and comparison shop for products and services including credit cards, debt relief assistance, insurance, mortgages and other loans. The company blogs about consumer finance issues at /. Since 2002, Bills.com has served more than 30,000 customers nationwide while managing more than $500 million in consumer debt. Bills.com is a division of Freedom Financial Network, LLC, whose co-founders and CEOs, Andrew Housser and Brad Stroh, have been named Northern California finalists in Ernst & Young's Entrepreneur of the Year Awards.