It takes time to build good credit. When you start out on your own, you have no credit history, which makes it difficult to get a loan or open credit cards. There are a number of factors that influence your credit score, and length of time your credit has been established accounts for about 15% of your overall credit score. As your credit score improves, your ability to apply for new loans, get credit cards, and better rates evolves as well. Let’s take a look at a few steps you can take to ensure you’re building a credit history early, and building it well.


Begin with Employment

To qualify for loans, credit cards or other lines of credit, you must be able verify that you have an income to make the payments. For small credit limits, even a part-time job is usually sufficient. If you’re a student, most colleges and universities offer a work study program or internships that can help you gain work experience as well as provide income. As your income grows later in your career and you begin to apply for larger loans and mortgages, lenders will begin to look at length of employment and income.

Open a Bank Account

Although opening a bank account will not directly contribute to your credit history, bank account information is required when filling out a credit application. The creditor will verify that the account is in good standing. Evidence that you are capable of managing your money will have a positive effect on your credit. In addition, maintaining a checking account can help establish a relationship with the bank and open the door for credit cards and loans.

Pay Rent and Utilities on Time

While most utilities do not report to the credit agencies regularly, late payments can negatively affect your credit. Paying your electric, water and phone bills on time helps prove your credit worthiness. Some credit bureaus also include residential rental or leasing payments on your credit report. Landlords are not required to submit payment histories to the credit bureaus and may elect not to due to the time expenditure. However, many large property management services do report to the credit agencies. If you are unsure about whether or not your rent payments are being reported, you should enquire with your landlord. In the event that they are not, you may opt to pay your rent through a third party service such as RentTrack or WilliamPaid. You can choose to have your payments reported to the credit bureaus when you use services such as these.

Apply for a Credit Card

There are several ways to obtain a credit card without an established credit history. You can become an authorized user on one of your parent’s credit cards, and if their credit is in good standing, it will help you establish your own. Secured credit cards are similar to regular credit cards except that you deposit money to be held as collateral. The amount you deposit typically determines your credit line. Some companies will issue you an unsecured card once you have established a good payment history. Credit cards from gas or retail stores are another good option. These cards are usually easier to qualify for and have lower limits.

When applying for credit cards, it’s important to compare interest rates and fees. Interest rates can vary widely and some cards charge an annual fee while others do not. Make sure you read the terms and conditions carefully. Once you have obtained a credit card, make all payments on time and keep the balances low. As you build credit, rather than applying for another credit card, request an increase in credit limit for your current cards. 30 percent of your credit score is calculated from your available credit. Avoid applying for multiple credit accounts within a short period of time.

Student Loans Build Credit

If you are a college student, one way you can build credit is with student loans. Since most student loan payments are deferred while you are in college, many people don’t realize that they help generate a positive credit rating. Any debt created becomes a part of your credit history. Even though no payments are being applied to the loan, the credit report still shows the account as current. The cumulative effect is that during the time you are in college, the account remains open and builds a positive credit history. Once you graduate, it is important to make payments on time to maintain a good credit score. If you are unemployed, it is critical to contact the lender and request a forbearance or deferment to suspend your payments until you gain employment.

Student loans also have a much lower interest rate than most other forms of credit such as credit cards, making them easier to pay back. Moreover, they offer a great deal more flexibility in repayment than any other type of credit. If you are experiencing financial difficulties, most student loans provide some type of forbearance or repayment program based on your income that will allow you to reduce or defer payments completely without damaging your credit. It’s important to remember that when student loan payments are deferred, the interest accrued is applied to the principal of the loan.

Another item to consider is that upon graduation you’ll have opportunities to further improve your credit history and score. As your credit score improves, you should explore student loan refinancing, which can lower your monthly payments and overall interest you’ll pay on your student loans. Remember, your original student loan was issued while you were just building your credit history, you may be able to refinance at a much better rate now that your credit score and history have improved.

Taking Out a Car Loan

An automobile loan can positively affect your credit report by adding a new type of credit. If you make payments on time, it will increase your credit score and show lenders you have the ability to take on large debt. Taking out an auto loan is often the next step after obtaining a credit card in the progression to applying for a mortgage. A cosigner can help you qualify for an auto loan if you have little or no credit history. The cosigner is responsible for repayment of the loan in the event that you default; however, you are still the primary borrower. The lender will consider the cosigner’s good credit history when determining the terms for the loan. As a result, you will usually get a lower interest rate when you apply with a cosigner. Over the life of the loan, this can save you a significant amount of money.

The Impact of Credit Score on Future Financing

Building a strong credit history early can greatly impact the type of lifestyle you live later in life. High credit scores will enable you to qualify for loans to purchase the type of car or house you want. You will also get lower interest rates that will save you money. Some employers use credit as a basis for hiring employees, and they are often used as criteria for leasing a residence. If you plan to start a business, good credit will help you acquire funding. Good credit provides a wide range of opportunities for your future.

Written by David Barak from LendKey, which is a marketplace for online loans from community lenders. LendKey allows you to find and apply for some of the lowest rate loans for private student loans, student loan refinancing, and more. Because they work with community lenders, they’re able to provide loans with better terms and rates.