Starting out trying to get a better credit score is difficult if you don’t know how to start. How to create a credit history is one factor and question we get quite often.
Credit history is made up of a credit report and a credit score. A credit report is an itemized list of any debts that have been owed to creditors. It rates your likelihood of being able to borrow money from a financial institution based on the information in the report. A credit score is basically just a three-digit number between 300 and 850, with higher numbers meaning a better chance of getting a loan.
Since a person can’t build a credit history without taking out loans or other types of revolving debt, it’s important to think about their future self when they make these decisions. You also want to make sure you’re making payments on time and keeping balances low, otherwise, it will start to hurt your score.
Most financial institutions will only look at your most recent credit report when they assess your ability to get a loan. Generally, you want to make sure the information in the report is accurate and up-to-date; clear any negative marks or delinquencies that aren’t yours, and pay down credit cards if they’re close to their limit.
Four Things To Start Creating New Credit History
1) Get a credit card, but only use it in emergencies or to make purchases you can afford.
2) Contact your current bank and ask for a credit card with a very low limit.
3) Open a line of credit for something like furniture, then pay it off every month.
4) Check your credit report and correct any errors that may be hurting your score.
Figuring out how to create a credit history can be quite difficult if you don’t follow the right steps.
Does Applying For New Credit Lines Hurt My New Credit History?
Some people have a mistaken belief that applying for a new credit line will negatively impact their existing credit score. They may think that lenders will see them as a risk and won’t extend the new line of credit. In reality, this is not the case. Your credit score isn’t determined by which credit lines you have or don’t have, but rather how well you pay them back.
The only way your score will be affected is if you don’t make payments on time, forcing your account into default. And then the only subsequent effect would be that late payment showing up on your credit report and decreasing your credit score.
Now let’s turn our attention to the effect of opening a new line of credit (e.g., a credit card) on your credit score. If for some reason you don’t misuse your new line of credit, then there should be no effect on your score at all.
The opposite is true as well: if you have a lot of open accounts that are not currently being used (i.e., they do not report any activity to the bureaus), this can actually negatively impact your credit score. This is because the scoring models look at the amount of available “credit” you have and how much you’re using. Having a lot of unused credit and little activity gives the impression that you’re not really using your existing lines of credit, which most likely means there’s a higher likelihood that you’ll miss payments on those credit lines.
So rather than keeping those unused accounts open and doing nothing with them, you’re better off closing any additional (non-utility) accounts that you don’t plan to use in the foreseeable future. This will not only reduce your overall available credit, but will also help avoid any potential issues down.
While applying for dozens of new credit lines in a short period will result in a slight drop in your overall credit score, for the most part, you don’t want to overdo it. Also, you don’t have to fear a large credit score drop while trying to get new credit lines.