Here is a statistic with which to open the haunting season: 42% of adults would be less willing to date someone who had bad credit.
Yes, it turns out that all of those obnoxious commercials on TV (not to mention the incredibly catchy ones) have a point. And it's not just your love life that can suffer. The truth is, love it or hate it, credit has become an almost-pervasive part of modern life that can hurt in more ways than most people ever realize.
So can being a ghost -- having no credit can be just as bad as having bad credit.
Credit "ghosts" are people with no credit history. They have either no credit report activity or too little for the reporting agencies to build a credit score around. Typically, this simply describes someone who is young or who prefers to work with cash on hand.
And it often doesn't come from bad behavior. In fact, many people who are very smart about their money can haunt the world of credit specifically because they chose to only spend what they have. Instead of using credit cards, they use debit cards. Instead of taking auto loans, they save up and buy used. You get the picture.
The trouble is that sooner or later even a credit ghost will want something that they can't buy with cash on hand. Whether it's a lease, a first home or a picky employer, having no credit or bad credit can come back to haunt you. So it's worth starting to pay attention to your credit score right away -- and the good news is that's very, very possible.
Credit bureaus update their reports every month, so you can literally start to build credit within the next 30 days. For a ghost, that can be as simple as just building a few points of contact. For someone who has struggled with their credit, it might just take a little financial planning.
How to Build Credit
1. Give Yourself Regular Checkups
Especially if you have bad credit, looking at your credit report can be a scary thing. In there lurks every missed payment, every outstanding bill, every bulk shipment of tamagotchis you drunkenly bought and tried not to pay for. If you're a millennial it's a reasonable chance there's a few notes from the Department of Education.
Check anyway. Not looking at your credit score is like skipping a physical because you're afraid of what the doctor might say.
Look. Look, look, look. The Internet is littered with websites that will provide a copy of your credit report, and the three major agencies (TransUnion, Experian and Equifax) run a website at annualcreditreport.com. What's more, your bank or credit card company, if you have one, may well provide this service for free.
By knowing what's in your credit report, you can see what you're doing right and what you're doing wrong. This is the place to start to understand everything else you need to do.
2. Pay bills on time
The next step is to set all of your bills to autopay. All. Of. Them.
Paying your bills late is one of the easiest mistakes to avoid when it comes to building credit. Late payments are often reported to the credit bureaus, which use payment history to calculate 35% of your score. What's more, these records will stay on your score for a full seven years. (Don't fret too much. Older credit history counts less than new, but still!)
To you, getting that check in to Comcast a few days late might not seem like a big deal -- and, let's be honest, in the big scheme of things it's not. That's not what your credit report will say,, though. Experian won't think "look, this guy pays his bills, he just sometimes takes a week to get organized." Their computers will only process "seven days late."
Set up autopay on all of your bills. If that's not viable, make sure you have a calendar with due dates meticulously noted.
3. Start saving money
As you now know, a successful payment history is crucial to a good credit score. And in addition to your existing bills and loans, you'll likely need to open at least one more line of credit in order to build it.
Point being, you're going to have to make multiple payments per month in order to build credit at the rate you're looking to build credit. So saving money wherever you can in order to have sufficient funds for everything will go a long way. You might want to start budgeting and looking at how much more of your paycheck you can put away. Ultimately, the most important way to build credit is to successfully make payments, and you want to put yourself in the best possible position to do that for the foreseeable future.
4. Get credit for rent
There are a lot of ways that housing is rigged against renters. For a long time credit reporting was one of them. As debt, a faithfully paid mortgage builds credit history and can make someone look like a financial saint. As a simple contract, rent did not. (Unless you missed a payment, then that information went right to the credit bureaus.)
Like faithfully paying bills, rent is money that you're going to spend anyway. You should get the benefits of those timely payments.
5. Get a credit card
Yes, of all things, we are going to recommend that you actually get a new credit card.
This is not so that you can play games with debt ratios (more about that in a moment). Instead, it's so that you can start building up a history of good, solid payments. The kind that look just great on a credit report.
If you have no credit or low credit, you will probably need to get what's called a "secured credit card." These are cards that you back up with a cash deposit. It's used just like any other card and the bank files your history of payments with the credit reporting agencies. The deposit is a guarantee in case of default and is returned when you close the card.
Opening one of these cards can be expensive because the bank will require the deposit up front. It's worthwhile, nonetheless. Get a card with a low limit so that initial fee isn't too expensive, then make regular payments. Pretty soon you'll trade it in for a card that pays you.
6. Consider getting a co-signer
This one is risky, and can depend on your specific situation. However, if you're relatively young and your parents have good, stable credit, you may want to consider asking them to co-sign for your line of credit.
If someone with good credit is willing to co-sign for your credit card and loan, it will make establishments more likely to provide the credit. That's extremely helpful if you're trying to get your first credit card. But if you do this, you have to be sure you can reasonably pay your balance. If you fail to make the required payments, both you and the co-signer's respective credit scores could nosedive. And if you're totally unable to pay the debt you owe, it will fall on the co-signer. So this can add stakes to the already high stakes world of credit.
Getting a co-signer is still something you can consider if you need credit, but only if you know you can pay your balance. Otherwise, look into other methods of obtaining credit.
7. Keep your credit accounts open
Not only do you need a credit card, but it can actually benefit your credit score to keep those cards open - provided you continue to make your payments, of course.
The amount of time you have had credit for is a substantial percentage of what goes into your credit score; 15%, to be specific. The longer you have credit accounts and are successfully making payments on them, the more dependable you seem and the better your reputation will be with regards to your finances. So the simple act of having these existing accounts for an extended period of time can help you build better credit.
Closing your older accounts, on the other hand, can shorten the credit history of your current accounts. That can result in a temporary downturn in your credit score that you will have to build back up.
8. Get a credit-building loan
Just like with opening a credit card, a credit-building loan is designed to solve the Catch-22 of credit history: To get a loan, you need to have paid a loan.
So instead, a credit-building loan works the other way around. The bank sequesters your loan in a special, reserved account that you can't touch while making payments. Once the loan is completely paid off, the bank releases the money to you. It's basically the exact opposite of how a loan ordinarily works. You don't get the money until after the debt is paid.
A credit-building loan is… well, it's a weird beast to be completely honest. You are effectively just paying the bank to tell the credit agencies that you paid them. It does work, though. The bank simply considers this a form of secured loan. Just be careful… if you default on this loan, you run the risk of losing both your payments and the principle, and getting a negative credit report to boot.
9. Reduce and manage debt
You knew we had to get here sooner or later. Unfortunately, the single best thing you can do to improve your credit score is to simply owe less money.
For consumers with no credit, this won't be a problem. Those with bad credit, though, often got into trouble because they have struggled. For many, this means debts and credit card bills that they just don't have the money to pay. There are a few things you can still do.
First and foremost, manage your debt. Credit utilization is a key component of your credit score. It tracks how much of your available debt you're currently using. The lower you can get that ratio, the better off you'll be.
That said, some credit is better than others. Having a lot of credit cards out there won't do you any favors -- even if they make it seem like you have a lower overall utilization. Close particularly recent lines of credit or unsavory ones (like store cards). Keep those that you've had for a while, especially anything older than a year. Old credit is good for your score, so you want that on your record.
10. Deal With Student Loans
For millennials struggling with their credit, the story often begins and ends with student loans.
It doesn't have to.
Student debt is terrible. It is a trillion dollar tab that the Baby Boomers left their children because they didn't want to pay more taxes. Yet every student loan authorized by the government comes with many payment options and protections for students who financially struggle. Whether income-based repayment, hardship deferrals, payment suspensions or something else, there are a wealth of options for students who can't pay their bills.
The catch is that to use those options, you have to ask.
This is a huge source of credit trauma for young adults, but it doesn't have to be. If you're struggling to establish better credit and you're under 40, there's a good chance at least a few missed payments to student lenders lurk in your credit report. Call them and start to straighten this out.
Why Your Credit Matters
Credit matters. As we noted up top, it can affect your life in ways you'd never even suspect. Just a few include:
- Insurance Costs. Whether it's auto insurance, renter's insurance or (astonishingly enough) even health insurance, having bad credit can drive your premiums through the roof.
- Getting An Apartment. Most landlords ask for a credit check these days. Don't be the 35 year old who has to ask his parents to cosign for his apartment.
- Getting A Job. Credit has, in many ways, become shorthand for personal responsibility. As a result, many employers have begun to look at it for warning signs during the interview process.
- Utilities. Cell phone companies, cable companies, even electric and gas companies might pull your credit report when you open an account. If they consider you unreliable, it might cost you a deposit.
Building credit is not an old man's game. The truth is that it is absolutely never too soon to work on your credit history. Anyone who's older 18 can start opening accounts in their own name, which means they can begin building their credit history right away.
That doesn't mean you should rush out and get a bunch of credit cards. Instead, think carefully. If you're young, see if your parents will make you an authorized user on their card, so you can get some of the benefits. Transfer your cell phone bill over to your own name (even if your parents are still making payments). If you do want your own credit card, get something with a limit low enough that you can't get in any real trouble.
It's never too early, and it's never too late, to start building credit. Once you begin putting the work in, you'll be surprised at how quickly those numbers start ticking up.