How to establish your credit history from scratch

At a recent presentation I had a couple of days ago, one of the questions that was asked was how to establish a credit history from scratch. This question sort of caught me off guard as I wasn’t expecting it. The reason is because I’m so used to hearing people talk about their bad credit history, debt which they now regret taking and short cuts they can take to get out of their bad situation.

For people out there that are interested in establishing a credit history, I will walk you through some of the steps I took when was also in that situation. A word of caution, unless you are about to take on “good debt” i.e., debt that is used to purchase an asset that will be beneficial to you and which you can pay off without any financial wishful thinking or gizmos (like hoping to get a windfall or inheritance or winning the lottery), you do not need to be so concerned about establishing a credit history.

One of the best ways to establish a credit history is to get a secured credit card from a bank. The secured credit card is like a conventional credit card; the major difference is that the secured credit card is secured by a deposit made by you into the bank unlike a conventional credit card which is unsecured. As an illustration, if you have $100 in savings, you can approach a bank to grant you a secured credit card with a limit of $100. You deposit the $100 into a savings account in the bank and the bank grants you the card. You can’t have a balance on the card greater than $100 and in the instance where you are experiencing financial difficulties; the bank simply uses your deposit ($100) to extinguish the debt. However, you do not want to practice habits that will leave you with credit card debt so do not carry any balance on the card at the end of the month. Use the card to pay for everyday items provided that you have enough cash which you can use immediately to pay off the amount on the credit card. For instance, if your weekly grocery shopping costs you $20, you can pay for the groceries with the card and as soon as you get home, pay off the balance immediately. Please, do not use your secured credit card to pay for items you do not have enough cash to pay off at the end of the month. The purpose of having the secured credit card is to establish good credit history and not to engage in frivolous spending otherwise the purpose is defeated.

If your utility bills are in your name, you could view a free copy of your credit report through annualcreditreport.com to find out if your utility company reports your payment history. If your utility company reports your payment history in your your credit report, this can also be used to build your credit history. As alway, make sure you pay your bills in time as a late payment not only results in you being charged with late fees but it also adds a dent to your credit history.

As always, if you have a different experience or know of other ways to build up your credit history from scratch, your comments are more than welcomed.