How to start credit history

The Key: Charging Little and Paying It Off Every Month

Updated Sept. 27, 2014 8:19 p.m. ET

Matt Jakubowski is careful with his credit cards.

In May, the 22-year-old both graduated from college and started his first job as an insurance broker in Mt. Laurel, N.J. That same month, he obtained his first two credit cards: a TD Bank Visa card and a US Airways MasterCard, he says.

He says he's diligent about paying off the cards biweekly, and that he aims to rack up as many frequent-flier miles and cash-back rewards as possible while keeping his balance to about 10% of his credit limit.

Fortunately for Mr. Jakubowski, it was easy for him to obtain the cards: He had built a strong credit history by paying off car loans while in college, he says. His father cosigned the loans. "We never missed a payment or were late," he says. "Sometimes we were even ahead."

Credit history and credit score have become important barometers of personal responsibility, says Jean Chatzky, contributing editor for consumer-finance site Bankrate.com. Because your credit has wide-ranging implications—potentially affecting everything from your ability to rent an apartment to job prospects—it's important to start on the right foot when building credit, Ms. Chatzky says.

A Long Recovery

And while you can recover from missteps, it could take about seven years for your score to recover fully after a significant drop, says Erik Larson, president of NextAdvisor.com, a personal-finance site. Your score is analogous to your school grade-point average, he says, in that raising it is possible but takes time and discipline.

"Achieving and then maintaining a good credit score is not some sort of a magic calculus," Ms. Chatzky says. In fact, she says, the golden rule of credit is simple: Charge a small amount on your credit card each month, then pay it off in full each month.

Don't use all of your available credit, Ms. Chatzky says. Instead, use 10% to 30% of what's available to you.

You shouldn't need more than two credit cards to get you started, Ms. Chatzky says. If you apply for many cards, the credit bureaus interpret that to mean you need money, and might lower your score, she

says.

She recommends one card with as low an interest rate as possible, so that if you did need to revolve—or pay interest on—a purchase, you could do so fairly inexpensively. Your other card should be for everyday use, and should hopefully have a points, miles or cash-back feature, she says.

It's a good idea to check your credit report at each of the three main bureaus—TransUnion, Equifax EFX -0.56 % and Experian—at least once a year, Ms. Chatzky says. You can stagger the reports and obtain a free one every four months, she says.

Check the report for errors and contact the bureaus right away to clear up any you spot. You can check your credit report for free at annualcreditreport.com .

Also check your credit score regularly. Your score is separate from your report, and several scores are associated with your name—one for each of the major credit bureaus, and possibly others calculated specifically for auto or mortgage lenders, Ms. Chatzky says.

Scores range from 300 to 850 (the higher the better).

You can check your score for free on sites such as creditkarma.com or savvymoney.com .

But if you've never had a credit card before, you might find yourself faced with a conundrum: How can you get that first credit card if you have no credit history?

Ask in Advance

One strategy is to have a parent first add you as an authorized user on his or her credit-card account, consumer-finance experts say. But card providers vary in whether and how they report such usage to credit bureaus, Ms. Chatzky says, so you might not be able to generate a credit history this way with certain cards. If you choose to go this route, be sure to ask the provider about its reporting practices beforehand, she says.

Another option is applying for a secured card, Ms. Chatzky says. This is a credit card with collateral attached—usually a bank deposit of a couple hundred dollars—making it a very low credit risk for lenders, and therefore easier to get without a credit history, she says.

After 18 to 24 months of responsible usage, you can usually begin using the secured card as a regular credit card, she says.

Source: www.wsj.com

Category: Credit

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