How do I build a good credit history?

Having a good credit history is important to your overall financial health.

Our credit history affects many parts of our life and it is a necessary component to our overall financial health. Consumer credit takes many forms, including installment loans, credit cards, department store revolving charge accounts, home equity loans and lines of credit, and other kinds of time payment plans. In today’s economy, if you have not already established a positive credit history it may be a bit more difficult now than it was a few years ago. But it is certainly possible to build positive credit.

One way to start building positive credit is to get a secured credit card. These types of credit cards require you to deposit funds with a financial institution in exchange for a credit card. For example, if you put $500 in an account, that will be the amount of your secured credit line. If you use secured cards responsibly, they will help to slowly but surely increase your credit score. Over time, the lender may raise your line of credit for “good behavior,” which means paying your bills on time, every time each month. Eventually, you’ll be a candidate for unsecured credit. Of course it is always important to read the fine print in any agreement and confirm that you will not be charged additional fees.

Another option is to have someone co-sign on a credit card or loan with you. eXtension defines a co-signer as someone who signs a loan with the borrower and promises to assume the responsibility of repaying the debt in the event that the borrower does not repay it.

The National Foundation for Credit Counseling (NFCC) says that you’ll need at least three lines of credit, or your file will be considered too thin for the all-important credit score to evaluate. The credit scoring model also likes to see different types of credit handled responsibly. Scott Day, Extension Educator with Michigan State University Extension says, “Apply for open-ended credit such as a credit card along with closed-end credit or installment loans where the payment is the same each month.” NFCC also recommends not using more than 30 percent of your available credit. This means if your credit card limit is $1,000 you would not have more than a $300 balance.

After about six months of using credit it will be helpful to get a free copy of your credit report. Only one website is authorized to fill orders for the free annual credit report you are entitled to under law — annualcreditreport.com or by calling 1-877-322-8228. But that doesn’t include a FICO® credit score, which can cost about $6 to $16. Be cautious as websites that claim to offer “free credit reports,” “free credit scores,” or “free credit monitoring” are not part of the legally mandated free annual credit report program. In some cases, the “free” product comes with strings attached such as monthly charges for the service. Contact Michigan State University Extension for more information about financial health programs.

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