This post has been updated for 2021

Establishing a good credit history is key to having a healthy financial life. Your credit score acts like a financial resume and has great effect on a number of areas in your life. According to a 2018 LendingTree study, consumers with a “fair” credit score (580-669) should plan on paying over $45k more in interest payments over a lifetime of debts like autos loans and mortgages.  This is in comparison to their counterparts with a “very good” score (740-799).  From leasing an apartment to getting a job, having a good credit score really does matter. Whether you are just graduating college and trying to establish credit history or you are just trying to build yours up, you will want to read on.  2021 is the perfect time to take stock in this very important part of your financial journey.

What Is a Credit History?

Your credit history shows how you have handled debt and bills in the past. Experian, Equifax, and TransUnion are the three major credit bureaus that track your credit history and compile it into credit reports.

Any time you apply for a loan, the lender will request a copy of your credit report from one or more of the credit bureaus so they can review your credit history. Included in the credit report is your credit score.  That can range from 300 and 850.  Of course, the higher the score the better.

If you have managed your credit well in the past, you can expect to have access to favorable interest rates when it comes time to apply for a loan.

Below are six ways you can quickly build up your credit history in 2021

1. Become an authorized user on a credit card account

An easy way to start building your credit history is to become an authorized user on a credit card. For Visa and Mastercard, this can be at pretty much any age. Discover and Amex require you to be at least 15 years of age. So, if you have a relative or friend willing to add you, you are in luck. The key thing with this is you want to make sure the account is in good standing. That means there have not been late payments on the account and that the balance is not almost maxed out. If this is the case, stay away.

If you do have someone who is financially responsible and you are added to their account, the entire history of that account will appear on your credit report. FICO does add this into their credit score algorithm so it can improve your credit score significantly in some cases.

2. Apply for a secured credit card

If you are having trouble getting a credit card, then applying for a secured credit card may be the answer for you. This type of card works similar to a regular credit card.  The difference is that with a secured card, you are putting down a security deposit with the credit card issuer in order to get the credit card.

$300-$500 is what you can expect to have to put down assuming you have decent credit. If you have negative items on your credit report, the card issuer may require a higher deposit. If you just don’t have much credit history and you don’t have any negative items, they may ask for a lower deposit.

Keep in mind, this is not a debit card that is tied to your bank account. You will get a bill each month like a credit card and you need to make a minimum payment. This payment will not come out of your security deposit. Your deposit is there in case you default on your payments. The purpose of this card is that the payments get reported to the credit bureaus. So each time you use the card and make payments on time, you are building up your credit history .

After you have been using your secured card for a year, and you have been using it responsibly, you have the opportunity to apply for an unsecured credit card.

3. Automate Your Payments

Making your payments on time each and every month is huge when it comes to your credit history. An easy way to make sure you do not miss a payment is to automate them. You can set up automatic deductions with the debtor or with your bank. If you set them up with your bank,  a payment is made anytime an electronic bill notification is received.

If you think you can pay it off each month in full, you can set up automatic payments with a credit card. You will build credit not just by paying your bills on time but also showing responsible credit card usage. Just always make sure to check your statements each month for accuracy.

4. Pay your credit card balance in full each month

The best and most responsible way to use a credit card is to pay off the full balance each and every month. Leave a balance and you start paying interest. The more of a balance you carry over time, the more damage you can do to your credit score. If for some reason you need to carry the balance, try and not make it for too long.

5. Make your payments on time each and every month

Payment history is a big part of what goes into calculating your credit score. For this reason, you must make your payments on time every month and never miss a payment. Furthermore, the effect is not just on your score but your late payments can also create negative marks on your report.

The best way to never be late is to write down the due date for each of your bills and set up reminders. With smartphones, there really is no excuse. You can also automate your payments and set up e-bills with your bank account.

6. Try not to open too many new lines of credit

While you are trying to build up your credit history, you want to be careful about opening up too many accounts at once. You want to spread it out over time. As an example, if you get an unsecured credit card, we suggest using it for a minimum of six months before you apply for any other credit cards or any other type of credit. This is key, since each time a lender checks into your credit report, your score goes down.

There is an exception to this rule. If you happen to be applying for a home loan, for example, you can apply with multiple lenders. This way you can shop and compare interest rates and loan types. If these loans are applied for within a 30 day period, the inquiries into your credit will only count as one.

How to keep your credit score in good standing

Once you have some credit history established, you want to keep it in good standing. Here are some tips to make sure your credit score stays up:

• Take advantage of the free credit report you are entitled to each year. Head to AnnualCreditReport.com to get a free copy.  Go through it thoroughly and make sure there are not any inaccuracies.
• Always pay your bills on time. If you make even one payment 30 days late, you can expect to see your score drop by as much as 100 points. Your payment history is 35% of your credit score.
• Payment history makes up the biggest part of your credit score. Don’t close your accounts after you have paid them off. They represent up to 15% of your credit score.
• Try to keep low credit card balances. How much of your credit you are using at any given time is 30% of your credit score, so the lower your balances are, the higher your credit score will be.
• Try to diversify your mix of credit account types. This makes up 10% of your credit score. So you want to try and have not only credit cards but also, an auto loan, an installment loan etc.

Building Credit FAQ

 

How do you get a credit score?
You need to have a credit line open for at least 6 months before you establish credit. Once you have this, you have established enough history and a FICO score will be generated.

What is the best way to establish good credit?
The best way to establish good credit is to pay your bills on time.  Once you do this over an extended period of time, you will see the benefits reflected in your credit score. Payment history is 35% of your credit score. You also want to carry low balances and pay them off in full if you can.

Can I improve my credit score by becoming an authorized user?
The simple answer is yes. This is incorporated into your score since the entire history of the account will be added to your report. Assuming there is a positive history on the account, you can get a nice boost to your score.

How old do you have to be to become an authorized user?
Visa and MasterCard cards do not have a minimum age. Discover and American Express require that you be at least 15 years of age.