How to Build Credit - Building Your Credit History

Reader Question: I've heard that I need to build a credit history in order to get loans, but I have no idea how this works. How do I create such a history? Do I need to get some credit cards or something?

It's true that you need to build up a good credit score history to get loans, credit cards, mortgages and other types of financing. If you do you not have any credit and are looking for a way to get started off on the right foot, a credit card is the way to go.



Since payment history plays the biggest part in your credit score, the best way to build good credit is to use your card a little and pay off the balance each month. This will establish a credit history for you, and it also shows lenders that you can consistently make payments.

But proceed with caution -- it is very easy to use the card to purchase items you normally wouldn't buy because you lacked the cash to do so. If you're not careful, you can quickly end up with a large balance that you can't pay off each month. So use the card sparingly, and pay the balance off each month (or at least keep them low). This is the smartest and most responsible way to build a credit history for yourself.

Here's another good reason to keep your balances low. The second biggest part of your credit score is utilization of accounts. This refers to the portion of your credit limit that's currently being used. You can hurt your credit score if your balances are close to the card limits, so be responsible with your card usage. Use them only for an amount you can pay back in a month or two. Check out our scoring chart below for a complete breakdown of your score.



Important Note: With all of this being said, you don't have to get a credit card in order to establish a good score. In fact, I would argue that you should not obtain a new card solely for this purpose. There are ways to establish good credit without cards.

So let's summarize what we have discussed. How to build credit is a common question among consumers in general, and among home buyers in particular. Building up a good credit history will help you qualify for mortgage loans and many other types of financing. The best way to build a history is by using a credit card in small "doses," and then paying the balance off each month. It's even possible to improve your score without using cards, and you can learn more about that through the link provided above.

Hope that helps. Good luck.

Related articles:

• Understanding Your Credit Score in 2009
• FICO Scoring Chart Shows Important Factors