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Sunday, September 1, 2013

How to build credit history

Credit history is used by financial institutions and lenders to help determine the risk level a potential client poses. Without a credit history it can be difficult to acquire a loan whether it be a credit card, car loan, education loan or even financing from a lending network of entrepreneur.

Making payments on time helps maintain or build credit score
Credit score is derived from the above five factors
To build credit history fast requires knowing what the most important aspects of credit score are, and how credit history is used. According to the Fair Isaac Corporation, the developer of the FICO credit score, credit history accounts for 50% of an individual's credit score. The remaining 50% of credit score consists of items that are largely made possible through a credit history.

Since 15% of credit score is determined by the length of credit history, it makes sense to focus more on the 85% of the credit score that does not emphasize how long a credit history has existed, but rather how well one has managed types and amounts of credit within his or her credit history.

Research the credit


Research loan types, uses and rates before applying. Practical uses for loans in addition to building credit history multiply their utility. This way the credit line serves both a useful purpose while simultaneously building credit history. Also, the rate at which the loan is obtained can help with other aspects of  building credit history.

Apply for loans


Before opening a credit account, it must be applied for. Request realistic credit limits and do so in a shorter rather than longer period of time. The Fair Isaac Corporation uses time periods between credit inquiries in its credit score assessment and recommends fewer rather than more accounts be opened for persons with a short credit history. The accompanying video on this page provides tips for first time credit applicants.

Use credit


Without actually using credit that has been granted, a more complete credit history can't be attained. Using credit is important because it gives creditors and credit reporting agencies such as Equifax more information  to base a credit score on. Having a low credit balance is good for credit history. A low credit balance affects the debt to credit ratio which is the amount of credit used in proportion to the credit available. Similarly, a low debt to credit ratio has a positive affect on credit use within credit history.

Pay bills 


Paying bills on time and consistently is very important in building credit history quickly. Loans with credit cycles of 30 days or less should have at least the minimum payment posted before the due date. Paying several days early avoids late postings and potential payment history complications.

* Image license: PNE; CC BY-S.A. 2.0