It’s true. There are a lot of things you can do without using credit. You can pay for your rent, food, and other necessities with a check, debit card, or cash. But building a solid credit history is important even if you prefer to pay with cash. Find out why and how to get started building your credit.
Why do you need a credit history?
If you don’t plan to take out a mortgage, get a loan or apply for a credit card, you don’t need to worry about establishing a credit history, right? Actually, that’s a common misunderstanding. Good credit is important when you want to get a loan or a credit card, but it’s also used to make other important decisions, like whether to:
- offer you car, renters, or homeowners insurance and what to charge you for that insurance
- rent you an apartment
- hire you for a job
Strong credit history is important because how well you handle your money can show whether you are a responsible, reliable person.
The basics of building good credit.
When you’re just starting to build your credit history, lending companies may look at a few things to help them decide if you are credit-worthy, including:
- Bank account history: Open a checking and savings account. Avoid overdrafts and bounced checks.
- Work and housing history: Professional lenders are checking to see whether you can hold a steady job, move frequently, and pay your rent on time.
- Utilities: Lending companies are looking for utility accounts (gas, electric, phone, cable, Internet, water, cell phone) in your name. Make sure you pay all your bills on time and in full.
The next steps focus on getting credit and using it wisely:
- Get a retail or gas credit card. These are usually easier to qualify for. Only charge what you can afford and always pay your bill on time and in full to build the strongest credit history.
- Get a secured credit card. These cards are tied to the amount of money you have in your checking account or a special account the lender sets up. The money doesn’t come out of your bank account as it would with a debit card, but you cannot charge more than you have in the account. Before you apply, make sure your payment history will be reported to the major credit bureaus. Secured cards may have high-interest rates or fees, so shop around for the best deal.
- Apply for a small loan. Borrowing and paying back installments or a small amount of money with a personal loan can be a stepping stone as you build your credit. Personal loans can vary from auto repair loans to travel loans, helping you to cover a wide range of costs. Don’t borrow more than you can afford and be sure to make all your loan payments and monthly installments on time and in full. Compare loan interest rates, terms, and fees before deciding on a personal loan.
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