Building a Credit History

UPDATE: This post was featured on the latest edition of the Carnival of Personal Finance.

I was listening to the radio today and a caller asked about beginning a credit card history...and the thought never occurred to me that some people either are just starting out and don't have a credit history or they're well-establish, yet still don't have a credit history.

How could this be?

Since college, I've been inundated with credit card offers and I've applied to nearly all of them, at least until my late 20s. My entire 30s were spend getting out of that debt, finally culminating in my wife and I moving into her parents house for 2 years while we paid every cent we earned into paying down the credit card debt.

I cannot even estimate the number of credit cards I've had over my lifetime. Yet I still came out of all this with a credit score near 800. So paying off your debts and being debt-free for a couple years does wonders for the FICO.

So imagine my surprise when I found out there were people out there who didn't have any credit cards now and never have! Preposterous!!!

Here's the deal: There are three main ways to get a credit card:

1. Become a college student
2. Get a secured card
3. Open a department store credit card

My first credit card, if memory serves, was a department store card. Then I got several "college" cards. I've never gotten, nor have I ever needed to get, a secured card.

However, today, #2 might be the best alternative for a lot of folks, especially those who are not attending college. Make no mistake, the offers made to college students for credit cards are pretty easy to get. But let's face it, most of us will not get that opportunity, as we've either graduated college and aren't going back or we're just never going to go.

A secured card can be acquired through your local bank, in most cases. The main thing to be aware of is the fee structure. I've heard of $500 secured cards that have about $400 in fees, leaving you with an open credit line of $100. This is not good. You might as well give somebody $500 and avoid the credit card altogether.

The idea behind a secured card is simple: Your bank gives you a credit cards that's tied to your bank savings account. $500 in your savings, you get a $500 credit line. When you pay your bill, you're paying yourself back. Once you've established some credit history (paying in full and on time every time), ask your bank to give you an unsecured credit card.

Most will.

Opening a department store card, like a Mervyn's or a Kohl's is even easier. Often you can apply while standing in the checkout line. Even more enticing, the department store often gives a percentage off purchase if you open a credit card account with them! How cool is that? The credit application process generally takes less than 5 or 10 minutes and off you go with your new Dockers, socks, and belt, 10 percent off list, and a $250-500 credit line.

Once you've established payment consistency, you can move on to the more univsal VISA, MasterCard, and/or American Express.

In summary, then, to establish a credit history, follow these steps:

• Get credit.
  
• Make your payments on time every time.
  
• Check your credit reports for accuracy (don't forget, too, that credit reports often alert you to ID theft). MyFICO is an excellent resource to use in this instance.
  
• If you must close an account, close the newest account first.
  

That's really all there is to it.

Sources & Links
Free credit report
Equifax
TransUnion
Experian
9 Ways to Build a Killer Credit Score
How to Build a Good Credit History
Build Credit
Carnival of Personal Finance

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