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How to Build Your Credit History with Tradelines

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Hard hat area: credit history construction here!The key to building your credit history and getting it as high as possible is very simple: act responsibly with credit.

Sounds simple enough right? The problem is that the system is a bit of a catch-22. Companies won’t issue you credit if you don’t have a credit history. You can’t develop a credit history unless you start getting credit. Sometimes you can get around this if your income is high enough and the credit card limit they offer you is safely low enough. If you don’t fall in that category, how do you start building your credit history?

When To Start

I believe you should start building your credit as soon as you can, which means when you turn eighteen. You can’t get a credit card before you’re 18 because you can’t enter into legal contracts. If a company were to grant you credit, they’d have no way of legally requiring you to pay! That’s why the credit card companies put on the blitz in college, that’s usually the first time you’ll be allowed to have a card.

Why do I believe you should start as soon as possible? It’s generally believed that to get a score of 750, you need two lines of credit with 24 months of consecutive on-time payment. That means if you start when you’re a freshman in college, maintain excellent credit habits, you’ll graduate with excellent credit.

How To Get A Good Score

If you want to get a 750 FICO credit score then you’ll need two tradelines reporting on-time payment for 24 consecutive months.

What is a tradeline? It’s a favorable item on your credit report and includes:

  • Installment loans: Installment loans are loans in which you may regular payments, such as a car loan, a mortgage, or even in-store accounts like for a large appliance (layaway doesn’t count). There’s a pretty good chance your mortgage company or car loan company will report your loan but if your installment account is at a smaller store, they won’t report it unless you fall behind.
  • Credit cards: You are probably familiar with credit cards but these include secured and unsecured credit cards.

There are companies that will sell you a tradeline. You put up some collatoral, pay some fees, and they will agree to report on-time payment for an agreed upon period of time. I don’t know how legal these companies are but the whole process sounds dishonest so I’d avoid them.

How To Start

So, how do you get these tradelines?

The easiest way for you to start is to open up a credit card account. Fortunately, credit card companies love college students because they are generally irresponsible (I was in college, I can attest to the fact that I was irresponsible… just not about money!) and can rack up a lot of debt. College students also tend to get higher paying jobs when they’ve graduated so they can usually service that debt fairly well. The end result is that you should be able to find a credit card willing to issue you credit. If you need ideas, I’ve collected a few of what I think are the best student credit cards.

If you can’t get a credit card from one of the companies on the list or you aren’t a student, don’t worry. Another great place to try is at the mall. Department stores are eager to sign up new customers because they know that someone who owns a Macy’s card will spend more time and money at Macy’s than someone who doesn’t. These credit cards typically have low credit limits, which is great for keeping you on track, and low credit requirements, so someone without a history can still get one. Don’t be offended by a $500 limit, that’s a perfect amount to start with.

If you can’t get an unsecured credit card from a department store, then your next best option is to try a secured credit card. A secured credit card is a lot like a debit card, except you’ll usually pay a bit in fees. Many experts recommend secured credit cards as a way of improving bad credit and it’s a good last option if you have no history and are trying to establish one (and the previous options don’t work).

To give you an idea of the fees, Bank of America offers a Secured Visa Credit Card with a credit line of $300 to $10,000, which is determined by how much you deposit as a security deposit. It has a $29 annual fee, compared to $0 for most other cards. You also don’t earn interest on the security deposit.

Check Your Credit Report Annually

By law, the credit bureaus are required to give you a copy of your credit report each year. You can request your credit report through Annualcreditreport.com. It’s the website the government setup to help the report request process.

The law does not require the bureaus to give you your credit score. For that, you’ll have to sign up for one of their free FICO credit score services. The services offer a free trial period, after which a monthly fee is assessed. In the past, I’ve used myFICO to check my credit score.

Finally, be aware of the various factors that go into your FICO credit score. Once you start building your history, it’s important to maintain good practices so your score can be as high as possible. A change in your score of a few points can dramatically change the interest rates you pay on loans.

How I Started

I started my credit history in probably the worst possible way – I signed up at a booth at my college in return for a t-shirt! I received a credit card with a low credit limit that I never abused (and that never abused me!). I was fortunate, so many students fall into the trap of easy credit and graduate with thousands of dollars in credit card debt. I graduated with a great credit score and none of the headaches my friends faced when trying to get their first credit card!

How did your establish your credit history?

(Photo: rcsj)

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36 Responses to “How to Build Your Credit History with Tradelines”

  1. Harrison says:

    Thanks for the guide on credit.

    I got my first credit card when I opened up my first saving account. After that , I’m so lucky that I got a personal loan from a bank and then I pay the fees on time. I also pay my credit card too. Lately I found that my FICO score hits 720 mark. I never know that I’m doing what you are telling here which happens to be some good steps to raise my credit. :)

  2. Joe says:

    Or, you could commit to never borrowing money, which makes your lack of credit history irrelevant. By saving to pay cash for everything, including a home, you save interest and pay for things quicker. It’s delayed gratification, but that’s always a better thing.

    • Jim says:

      While I think it’s a laudable goal, paying cash for a home in many areas is not feasible. It’s very easy to establish and maintain a good credit score if you act responsibly.

      • Joe says:

        Why would it not be feasible? Perhaps not feasible to purchase a 2000 sq/ft home initially with cash, but it’s always feasible to pay cash for a home if you live on a budget and save. Anyone telling you otherwise is making excuses. If you can afford to pay a mortgage (including interest), you can afford to save for a home and pay yourself interest.

        • dilbert69 says:

          It’s ridiculous to think that anyone would be able to buy a house or condo without borrowing money. If you save $1,000/month, it will take you 30 years to accumulate $360,000, and by then that amount won’t buy anything.

          • Joe says:

            Dilbert,

            I suppose if you put your $1000 in a jar each month, it would take you 30 years. I assume you’re smarter than that. Instead, if you’re putting it into a mutual fund that averages 12% over the years of investment, which most good ones do over the 10 year track record, then it would take about 13 years to save up to pay cash. If we look at a 15 year mortgage for $360,000 at 5%, which you pay so much more and it takes 2 years longer to pay it off.

            With your plan, you pay $2,846 a month and $150K+ in interest.

            No matter how hard you try, you can’t make the math work.

            It’s ridiculous to think it’s NOT POSSIBLE. Delayed gratification my man. That’s the key.

          • Jim says:

            12% seems a bit of a rosy expectation given our market performance, anything you had a year ago in your account earmarked for savings lost 40% of its value… granted it will eventually return but expecting 12% seems a bit pie in the sky. You have a bad year and your plans are thrown out of whack. Inflation also eats into your gains, all the while you’re not enjoying your home, but someone else’s that you’re renting.

        • Jim says:

          I think that you’re oversimplifying things a bit. How long would it take you to save up $295,000, the purchase price of my home? Many many years, and in that time, while I paid 5.75% interest, I’m able to enjoy the home… I think that’s worth something.

          • Bri says:

            Another oversight, where do you live while you’re saving this money up? Sinking money into rent for 10+ years seems pretty ridiculous to me when you can be putting the same amount towards actually owning property.

    • StephaniePTY says:

      I get what you’re saying, Joe, but it’s important to remember that your credit score can be used to determine other things as well. I’ve had potential employers pull mine when considering whether they want to hire me or not! Landlords will also frequently pull credit scores when evaluating possible tenants. Some states even allow insurance rates to be partially based on credit history.

      So sure, you can commit to never borrowing money… but that still won’t make your credit history irrelevant.

  3. CuriousAG says:

    Hey Jim,

    Nice facts to know for anyone who never cared about their credit. I would like to point-out one misconception though. Many people think that paying minimum payments on their credit cards doesn’t affect their credit score. Do you think this is true? I believe that paying minimum payments will potentially avoid one to incur any finance charges but it does affect the credit score.

    • Jim says:

      Making minimum payments will improve your score because it shows the ability of the borrower to repay debts. Your score will not go down if you only make minimum payments.

      That’s not a good reason to make minimum payments though because you still incur finance charges on the balance you aren’t paying off. It’s more important to avoid paying interest than it is to build up a credit score & history.

  4. My first credit card was a Sears card, which I got during college. I think I bought a set of wrenches, and paid the minimum after the bill arrived. After repeating this for a few months, I happened to notice something: FINANCE CHARGES! That realization put me on the path to never wanting to carry a balance.

  5. StephaniePTY says:

    I got my first credit card just after I turned 19. My college (RIT) banned credit card companies from our campus, so I was never tempted before that, except by the offers that came in the mail. (And to be honest, I was never tempted by the ones in the mail. I mean, come on, I’m not going to trust you just because you junk-mailed me!) After reading The Motley Fool’s Investment Guide for Teens, I learned about credit histories and decided to get a credit card to establish mine. I got my first credit card from Amazon.com and Chase, since I buy most of my textbooks from Amazon anyway. It’s worked out pretty well for me.

    Later on, I realized that simply having student loans was also working to build my credit history. That’s an important thing to remember! What that also means, though, is if you graduate with no student loans, and never got a credit card in college, you graduate with no credit history, which can put you at a disadvantage. (Which seems totally backward, doesn’t it? My debt puts me at an advantage!)

  6. eric says:

    Don’t let the anti-credit crowd get you down Jim (it seems to be an ever-growing force these days.)

    Personally, I’m quite happy about how I got my first credit card. Decided to do the proper research without anyone telling me to and found a good card (actually turned out to be one of your recommended ones…score!) Never paid a finance charge and earned hundreds of dollars of rewards from it actually.

    Maybe that’s why I’m not so bitter about credit. :)

  7. C.J. says:

    Why would you need good credit if you paid with cash, like everyone should?

    • Jim says:

      Many places outside of lenders rely on your credit score, like whenever you need to rent anything (apartment/house) because they’re essentially “loaning” you whatever you’re getting for the rental period.

      • C.J. says:

        That is a valid example, and I agree. I just was hoping the overall message wasn’t saying that you need good credit or even credit at all because we dont want young people who are ignorant to finances thinking that credit is how you purchase “things”. Agree?

    • Bri says:

      It isn’t always most beneficial to pay with cash. I always have the money sitting in a bank account, but why pay cash when I can get between 1%-5% cash back for buying things I was already going to buy? I pay my balance in full each month, plus I can save my rewards up for gift cards ro stores I frequent that multiply my bonus.

    • Bri says:

      Paying cash isn’t always the best way. On a small scale, I use my Discover card for all of my purchases because I get between 1% & 5% back on everything. On top of that I can save up my rewards for gift cards that can even double that reward at store I frequent. Why pay cash when I can make money off paying with my credit card? I pay my balance in full each month so not only am I building a positive credit score I get to make interest off my money while it’s in the bank AND make my bonus rewards off the credit company. Similarly, for larger purchases if you can qualify for a low interest loan it could be more beneficial to invest your money in a high-yield account rather than paying cash for it.

  8. Splendor says:

    My first credit card came with a free t-shirt in college too! :)

  9. ike says:

    Thank you guys for all the useful comments. I am new to this system and getting all these shades of ideas is enriching to me.

    My question
    I have never owed a credit card and thus have no credit history. Will it affect my records if apply for one and i am denied. Basically will the fact that i was denied credit on my first or second applications affect negatively my future ratings when i finally get one?

  10. Damon Day says:

    One great way for young people to jump start their credit score is referred to as piggy backing. I did this when I was in college. I had my parents add me as an authorized user on two of their cards. That basically gave me instant good credit. Now of course I know if that was the only thing I had a lender could see through that, but couple that with two other small balance accounts in good standing and I really had a good start.

    A few years ago fico changed how authorized user accounts were scored so that people could not do this anymore. The main reason was to combat fraudsters that were actually selling positive trade lines. No Joke, there were companies, that for a fee would add you as an authorized user to some account. Fico didn’t like this very much and cut it off.

    However recently I read that Fico has changed it back and being an authorized user on a positive trade line will have a positive affect on your score again. So if you are trying to boost your score and you have a good friend or family member willing to add you as an authorized user it might just give you a nice little bump. Of course the family member doesn’t even actually have to give you the card so you don’t have the ability to spend their money :-)

  11. Morgan says:

    Another great way to get your credit history started, especially in this tight credit market is if you’re a member of a credit union. Anyone can join some credit union and there’s probably one in your town.

    The thing to do is get a line of credit on your checking account, which is technically an unsecured loan. If you spend money that’s not in your checking account, money is released from this line of credit. You can pay it back in monthly installments, or do like I do and pay it back that day… I check my account online frequently and just simply move money from my savings account to my checking account. There’s no overdraft fee and I’ll pay (at most) pennies in interest if I forget to pay it off that day. I hardly ever use it, and it doesn’t cost me a dime (unless I forget) and it’s improving my credit score!

  12. Dan says:

    Jim,

    Where did you get the info that “It’s generally believed that to get a score of 750, you need two lines of credit with 24 months of consecutive on-time payment.”

    I have been told it takes much longer than 24 months of solid history for a score of 750.

    I hope I can get up to 750 but just curious…

    • Nick Burton says:

      This is possible if you have a clean credit report with almost nothing on it. When you insert 1-2 tradelines on a credit report with 0 history, it’s almost automatic that you receive a score anywhere from 750-800. It’s once you start adding other tradelines with balances near the credit limit and other various negative items that will keep your score in the 600s or lower.

  13. Nick Burton says:

    This is a great article. You are telling users how to establish a credit score. One tedious thing about building your credit score is time. It takes a long time to establish good accounts with over two years of history, which is a main factor when being approved for loans. Though time can present a problem for people who are in a tight schedule, there are other alternatives (though you have to pay some fees) to building your credit score much quicker.

  14. sean says:

    if i have a credit card account that has reported on time for 5 months is there a significant jump in score at month 6 or are there any other magic numbers within the repositories scoring models?

  15. Eric says:

    Just applied for an auto loan today and got declined. I only have 2 trade lines, and was declined because I did not have 4 trade lines. Its almost like to borrow money, you are required to make tons of dumb mistakes by buying crap that you do not need on credit. Not quite sure what Im going to do, but I have to figure something out.

  16. David says:

    Eric, Credit is a moving target. While I agree with Joe, who sounds like Dave Ramsey, I don’t believe paying cash for everything is realistic. Your situation at the bank is more realistic. To establish a 750 credit score it will need to be done with more then just 2 lines. Some Credit experts suggest 1 installment loan (e.g. mortgage and/or car) and 3 Credit Cards with balances less then 30% of your high balance or max limit, whichever shows on your Credit Report. You may need to find a secure line of credit, which the lenders will usually switch over to a unsecured line after a 6 to 12 months of on time payments.

  17. Dave Listor says:

    Many of you are wrong. I never wanted credit and paid for everything cash(salary of $158k) to include a home(rent to own), car, college amongst a plethora of other things. At 40 years of age, I wanted to try and build a credit profile and when I got my report, it was considered a “thin file”(no credit history and thus a 620 score).I applied for two credit cards, and was approved for both one for $3500 and the other for $5000. I use them often and pay almost 90% off every month just leaving a small balance to reflect the bureaus ever changing methodologies of scoring. Im 42 now an both card limits have more than doubled and I now have a 780 score. It is possible

  18. Dave Listor says:

    Btw to pay off a $5000 credit card(max’d) only paying the minimum amount will take over 25 years.

  19. Mike says:

    It is a wonderful thing to pay in cash but with insurance companies and and employers trying to snoop into your credit it still pays to have a strong credit rating.

  20. Jason Dyer says:

    I dont like the fact that I had to use Trade lines to help me get financed for a new house but I do know that I got hell of a lot better deal with a 720 score than they were going to give me with a 640. I used a company called Reinstar financial, they were upfront and didnt give me false information about what they could or couldnt do. It was expensive but it worked and honestly with the lower interest rate it paid for itself in about 8 months. Banks have been ripping us all off for years, Trade lines are a way of leveling the playing field

  21. C E L says:

    What most people are missing is the power of LEVERAGE with credit.Most of the wealthy people would not be where they are if it hadn’t been for the use of credit at some point and time.

  22. Courtney says:

    @ Joe,
    While you paint a beautiful picture that a lot of us wish we could do, it isn’t realistic for everyone. I’m in the process of buying a home with my husband. We just had a beautiful baby boy 4 months ago and need a suitable home for our new family. Combined, we make 50k a year, at best. We cannot afford to pay rent AND put away $1000 every month. So do we not deserve to own a home just because we need to borrow to get it? By the time we could save for a home, our son will be grown and moved out. Not to mention that we would waste more money on rent while saving than we would on the interest we’ll pay on our mortgage. In a perfect world, yes, it would be best to pay cash for everything and never borrow, but we most certainly don’t live in a perfect world.


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