Whether you have no credit or have less than good credit, you need to build credit. This article offers tips on how to build up credit for both cases. No, this is not about credit repair, which is a whole different subject.

Why should you care about building up credit? Isn’t having credit (good or bad) the same as being in debt? And isn’t being in debt after all a bad thing? Hmm…

First of all, and if you didn’t already know, credit history is creeping into virtually every aspect of our lives. This includes aspects that previously had nothing to do with credit such as employment.

More and more employers are using credit history in hiring decisions. Yes, you may have all other credentials, but that dream job could remain just a dream if you don’t have credit or have bad credit. I know, horrible. But true.

You cannot get a decent apartment leave alone a home loan, without good credit. I have been there. I have stared homelessness in the face because of bad credit. Worse, many landlords will not even allow cosigners for bad credit.

A big number of insurance companies are charging premiums for home and auto insurance based on credit scores. Their argument is that people with bad credit are more likely to file a claim. I think it is just another way to get squeeze more money out of us but that’s subject of another article (see Is Your Insurance Auto Company Discriminating Against You?).

And no, having credit and being in debt are not the same thing. You can have great credit without being in debt. You also can have bad credit and be in debt (if you’re not paying your bills on time chances you are in this category). It is the way you use and manage credit that matters barring misfortunes such disease or lose of employment.

Here are a few points on how to build up credit:

1. Understand the basics of credit scoring: I wish I’d known this long ago (but in this case, better late than never). The two most important credit scoring components are payment history and available credit. Just this one piece of knowledge can help send your credit score through the roof if you do certain things right.

2. Open a savings and checking account: Lenders like to see this as it is an indication of financial stability. Try to keep these accounts active and with a reasonably good (depending on your income) average daily balance. A checking and/or savings account will not build your credit history, but they could help make getting credit easier albeit just slightly.

3. Get some plastic: If you don’t already have a credit card, get one as soon as possible. You might want to start with the easier to get credit cards such as secured credit cards. Be sure to ask whether it will be reported to the bureaus as secured, which is not what you want. You want it reported as a regular (unsecured) credit card. Realize that some banks (including the big ones) can be economical with the truth. I have personal experience whereby one bank told me my secured account will be reported and unsecured. When I obtained my credit report it showed the account reported as secured.

4. Get a merchant or retailer credit card: This is related to the above point (#5) about getting some plastic. Merchant or retail credit cards (such as store or gas cards) are easier to obtain. If you have really bad credit, don’t go for retail store cards as you might not get approved: go for merchant card instead. Merchant cards often come via junk mail and can only be used to purchase items from that particular merchant. Word of caution: some merchant cards are outright scams and others don’t report your payments to the bureaus.

5. Establish an installment account: An installment account is one that you can pay off over time. Examples are a car payment, cash loan or mortgage. Again, the easiest way to get this is by securing it through a secured cash loan. Once more you want it reported as unsecured. The reason for this is that it helps create a “mix” of credit types, which lenders and the bureaus like to see.

6. Don’t go to fast: Don’t apply for new credit accounts too frequently. Try to space them out (six months to one year between accounts). The reason for this is that each credit enquiry (which must be done when opening a new credit line) dings your score. Not only that but, when you apply for credit too frequently this is seen as a sign of trouble or desperation.

7. Establish several revolving credit lines: Get at least three but not more than five credit cards or credit cards plus a bank line of credit (overdraft protection. This indicates ability to manage credit, which is a good thing. But don’t rush to establish these accounts (see #6 above).

8. Keep balances low: This is related to point #1 above about understanding the basics of credit scoring. You should aim at keeping your credit card balances at 30% of limit or less. The reason is that high balances are seen as a sign of instability and negatively affect your credit score.

9. Make timely payments: This is the most important aspect of building credit. Make your payments on time, all the time. Without this you might as well not build credit at all. Pay your bills on time. If you can’t make a payment for any reason, talk to your creditor(s) so they don’t report late payments as late (but please do it in good faith.

10. Get started: The sooner you start the sooner you will build up credit history.

Related posts:

1. How to Start Building Credit
2. How to Improve Your Credit Score
3. A Few Steps to Clear Bad Credit History
4. Can I Add Rental History to My Credit Report?
5. Bad Credit Rating Repair Guide and How to Raise Your Score