Building a Positive Credit History From Scratch

Building a Positive Credit History From Scratch

Use Revolving and Installment Debt to Build a Credit Score Fast

Although a credit history can be created from scratch using only one type of debt, if a consumer utilizes both varieties of debt, he or she can build a good credit score much more quickly. The types of credit used accounts for 10% of a consumer’s score. By varying account types, an individual can build points faster.

Revolving debt is one type of credit. It consists of any account that revolves back to a original amount after payment. Some examples of revolving debt are:

  • Credit cards (both secured and unsecured)
  • Lines of credit
  • Department store charge cards

Installment debt has a finite amount that must be paid off by the consumer in regular installments. Some examples of installment debt are:

  • Personal loans
  • Mortgages
  • Vehicle loans
  • Student loans

Secured Credit Cards Help Build Credit

A secured credit card works by a system in which the consumer makes a payment to the credit card company and the payment he or she makes becomes the available credit limit. The consumer then borrows against that amount. This results in a reduced risk for the credit card company and the beginnings of a credit history for the consumer.

Secured credit cards are available to consumers with no previous credit history, provided the consumer is able to make the down payment. These cards also report a trade line to the credit bureaus, ensuring that the individual is able to build a credit profile by using the card.

Prior to applying for a secured credit card, however, individuals should verify that the account will not be reported as a secured account to the credit bureaus. This can be seen as negative by any lenders or creditors reviewing the credit report.

Personal Loans are a Good Option to Create a Credit History

Even without a previous credit score to fall back on, an individual can request a personal loan from his or her bank. A consumer’s personal bank is more likely to be willing to work with the individual because the bank has access to financial records that demonstrate the income level, savings, and responsibility level of the individual.

Banks can extend secured loans against property a person already owns. In this case, that property is money. By borrowing against funds already in the bank, the individual may t then make the installment payments on the loan and have a positive trade line inserted in his credit report as a result. Funds borrowed against may be frozen by the bank until the personal loan is paid in full.

Use a Co-Signer to Qualify for Installment Debt

In some cases an individual may not have any collateral to provide in order to be approved for installment debt, yet still strongly desire that an installment trade line appear on his or her credit report. In these cases, provided the loan in question is small, a co-signer can usually be enlisted to ensure loan approval.

A co-signer is someone with good credit who agrees to sign for the loan in the borrower’s stead. In the event the borrower does not pay the agreed upon payments, the lender then has the right to demand those payments from the co-signer. Many individuals attempting to build good credit will have their parents or spouses agree to co-sign for a loan.

Any variety of loan can be used to procure an installment debt trade line.

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