What is credit history? | accelerate credit
How to build a strong credit history
Building a credit history takes work and unfortunately doesn’t happen overnight. However, there are a few things you can do to improve your credit history, which we’ll outline below.
Start with what you can afford
You may need to apply for some type of credit or loan to establish credit history. As a rule of thumb, don’t borrow more than you can afford to pay back. You might want to consider a few types of credit that people with minimal or no credit history can use to build credit:
- Secured Credit Cards: Secured credit cards require a cash deposit to open an account. This reduces the risk for the credit card issuer. For example, you can post a $200 deposit as collateral and receive a $1,000 line of credit in return. Finally, you may be able to apply for an unsecured card when making your regular payments.
- Authorized user credit cards: As an authorized user, you can use a master account holder’s credit card. You would have access to your own credit card linked to the main user’s account. As an authorized user, you can access the account without having to fill out an additional application or undergo a credit check.
- building loan: Credit builder loans are used to make fixed payments to a lender (who holds your money in a bank owned by the lender). At the end of the loan term, you will have access to the loan amount.
- Co-signed loans: Co-signed loans involve another person agreeing to take responsibility if you fail to make your payments. It is important to choose someone you trust to help you build a good credit history.
- Credit cards for students: If you are a student, you can also apply for a student credit card. A student credit card typically offers lower credit limits and fewer incentives, but gives you a good start toward building credit.
Pay your bills on time
Credit histories place a high value on whether bills are paid on time. As previously mentioned, a FICO® Score category comprises 35% of your payment history. Pay your bills on time every month, even if you can only make the minimum monthly payment.
Late payments will show up in your credit history and may affect yours credit-worthiness. They can also stay on your credit report for up to 7½ years, although the impact of late payments diminishes over time.
Keep your accounts open
The longer you keep accounts, the stronger your credit history will be. If possible, avoid closing lines of credit. This action can increase your credit utilization, which refers to the ratio of your total credit to your total debt, expressed as a percentage.
For example, if you have two credit cards with a limit of $1,000 each and you owe $500 on both, your credit utilization ratio is $1,000/$2,000, or 50%. You want to try to keep your credit utilization as low as possible.
Keeping your accounts open can demonstrate a longer credit history, while closing them automatically shortens your credit history.
Check your credit reports
Checking your credit reports is important because errors can affect your score. It is possible that your credit report contains incorrect personal information, incorrect accounts due to identity theft, inaccuracies in account status (e.g. closed accounts reported as pending), balance or data administration errors.