How to Build Your Credit History

by Vered DeLeeuw · 11 comments

“I’d like to purchase a mobile phone,” I told the guy at the store. He had me fill an application, and after a few minutes, came back to me and said, “I’m sorry, we can’t give you a contract. You don’t have any credit history.”

I arrived at the US in 1999 with no credit history. I quickly learned that without established credit, your options are very limited. You can’t get a credit card, you can’t get a cell phone, and you certainly can’t get a car loan or a mortgage.

But if you can’t get a credit card, how can you start building a credit history? It’s a catch-22, for sure, but as I’ve learned from personal experience, there ARE ways to make it happen. My advice applies to anyone that arrives in the US from another country. It also applies to high school graduates embarking on their own lives as adults, and to anyone who needs to build or improve their credit.

What is Credit History?

Your credit history or credit report is simply a record of your past borrowing and repaying activities, including information about late payments and bankruptcy. It enables lenders to decide if you are “safe” to lend to. It’s basically an assessment of your ability to repay a loan.

Why Do I Need a Credit History?

Commenter KM said it quite eloquently in this post on the value of saving: “Sadly, you are punished for living within your means and not borrowing. When I tried to extend my Line of Credit at the bank, they said that although my credit score is 800+, I needed a cosigner because I had so little credit history. Their reasoning was ‘if you have never made payments for a car, how can someone trust that you will make payments on a new car?’ My answer, “Because I am actually responsible and don’t have debt” was not accepted.”

It’s true. Even if you much prefer to patiently save towards a goal instead of borrowing, you need to borrow SOMETHING. Otherwise, if and when the need arises and you need to borrow, you’ll have a hard time getting a loan, or getting a good rate on your loan.

So, how do you build a credit history if you can’t get a credit card?

Some Credit Cards Are Easier To Get

Back in April and May of 1999, getting a cell phone wasn’t the only issue. My husband and I applied for several major credit cards, and were rejected by all of them. Finally, we were able to get a low-limit credit card through the bank where we had our checking account.

Another option is to get a store card. Store credit cards tend to have low credit limits and a more lenient approval process. Use the store card to build your credit history for a few months, then apply for a major credit card.

Pay on Time!

This is obvious, I’m sure – your first and only credit card is NOT the place to mess up. Pay each statement promptly and in full. To make sure you can actually repay, don’t borrow too much – only charge on the card the amount you can actually repay, and try to keep your balance at 30% or less of your credit limit.

Open One Line of Credit at a Time

After you get that initial credit card, don’t go crazy applying for several more cards, or loans. Open just one line of credit at a time, prove that you’re a responsible borrower, and only then open another line of credit.

Check Your Credit Report Annually

Use to check your credit report annually. You want to make sure your credit was reported by the lenders and is being recorded, and you want to make sure there are no mistakes or identity theft issues.

Keep That First Credit Card

This is the card that establishes the length of your credit history, so hold on to it, even if you’ve moved to bigger and better cards and don’t need it anymore.

Revolving Debt Only: A Bad Thing?

I’ve heard that it’s not a good thing to ONLY have credit card debt, since it’s revolving debt, so you want other types of debt too, such as a car loan, a mortgage or a student loan. In my personal experience however, we only have credit card debt, and our credit score is excellent. Since we didn’t NEED a loan, it didn’t make sense for us to borrow – and pay interest – just to build a credit history, when we can do it for free with a credit card.

It Pays to Have a Good Credit History

Once you become eligible for one of the major credit cards, get a reward, or a cash-rebate card, and you could save nicely – as long as you pay each statement on time and in full. A good credit will also help you get a better rate on a mortgage if you ever need one. As KM’s story demonstrates, even if you prefer cash to credit, building a good credit history is a worthwhile financial move.

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{ read the comments below or add one }

  • Dan W. says:

    I started with a secured credit card when I was 19 and from then started to establish good business relationship with my bank. I had my first credit card a few months later and settled for the best fees possible.

  • Ross @ Go Be Rich says:

    11. I don’t see the issue of having no credit and thus being denied things as a punishment for living within my means and not having debt. Debt inherently is not a bad thing, and credit is really the only way a business or another individual knows for sure that you are responsible with your money. If a business sees someone with no credit, they don’t think to themselves, “this person is responsible because they’ve never had debt”, instead, they think to themselves, “this guy has never proved that he can borrow money and responsibly pay it back within the terms of the loan”. Even the American government at one point had no credit, way way way back in the day. As a result, not too many countries would take a risk on lending us money, because we had never proved we could pay anyone back. Now we have the opposite problem.

  • Jenna, Adaptu Community Manager says:

    I started building my credit score when I was 18. Bought one thing a month on my credit card (like yours through my bank) and paid it off every month. Slowly and steady, but it worked back in the day.

  • KM says:

    Oh wow, I actually got quoted 🙂 I am just now starting to build my credit history after being added to the mortgage on the house, for which I will be paying from now on. So another option for building credit history is getting a cosigner that you trust and who trusts you. I know it’s hard to trust people when it comes to money, but if you have someone like that, it might make things easier.

  • MoneyNing says:

    I had the same problem of not being able to get a credit card when I moved to the US many years ago. What Wells Fargo asked me to do in order to build that credit history was to apply for what they called a “secured” card, where I have to deposit a fixed amount first to act as the credit limit. Essentially, it was a debit card but getting the secured card helped me get started.

  • Patrick R. Carlson says:

    These are great tips for anyone trying to build credit or restore a tarnished credit score.

    My law firm handles bankruptcies for individuals and small businesses. These are tips that will be helpful for clients after they’ve filed. I will certainly pass along this tip (along with the rest of the blog) for those clients that are serious about rebuilding their credit and finances.

  • Tracy O'Connor says:

    Hi Vered! We ran into the same problem when we moved back to the States (I’m American but lived abroad most of my life, my husband is Irish). We took the same route as you, starting with low limit credit card accounts with our bank and building from there.

    We could have taken a mortgage a couple of years before we ultimately did as this was during the time when they were still writing crazy no-doc loans, but we opted to wait until we qualified for a conventional mortgage. I’m so glad we waited.

    • vered says:

      “We opted to wait until we qualified for a conventional mortgage.” Tracy, I wish everyone – including the financial industry – was as smart as you guys. It would have spared us all from this financial mess that we’re still struggling with.

  • Adam says:

    The best way to use a credit card is to pay off the total amount owed every month without paying any interest. I like to keep in mind that any interest I pay is making someone else rich, so I try to avoid it as much as possible.

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