All else equal, lenders feel more comfortable lending to you when they know you’ve handled credit over a long period of time. The concept is simple and straightforward. But in the real world, things can get complicated. Let’s dive in.
Credit scoring models generally factor in length of credit history
Think about it this way: if you don’t have a credit history (or not much of one), who knows if you’d pay a loan back? Lenders don’t like to “hope” borrowers will pay their debt. They like to get as close as possible to knowing. And having a history of on-time payments to fall back on can go a long way.
This begs the question, though: if you need a credit history to get credit and you don’t have a credit history, how do you get credit in the first place?
Ways to get credit when you don’t have credit
Getting your first shot at proving you can handle credit can be tough. Fortunately, though, there are a few things you can focus on to increase your chances of getting approved for credit for the first time.
1. Look into store credit
Retail credit cards usually have smaller credit limits, which limits lender risk. That means they can be easier to get approved for. Plus, store cards often come with rewards like cash back, points or free shipping.
2. Consider a secured card
For this type of card, if you’re approved, you deposit cash that serves as your credit limit. That way, if you default on the card, the lender can keep the cash as collateral. When evaluating secured cards, pay attention to fees and other charges. Also, make sure they report your account activity to at least one (and preferably all 3) of the major credit bureaus: TransUnion, Experian & Equifax. That way, you’ll get credit (no pun intended) for the credit history you’re building.
3. Become an authorized user
One way to build a credit history is to become an authorized user. You can ask someone (usually a family member or trusted friend) to add you as an authorized user of their card. That way, the account’s history will be added to your credit report.
A few things to be careful about, though. Choose someone you trust whose account is in good standing. If you’re an authorized user on an account with missed payments or that ends up in collections, that account’s information will also show up on your credit report.
The #1 thing you can do to manage credit history length when you do have creditGetting credit is a good way to build a credit history. But what if you already have one? In that case, the best thing you can do is be careful about closing accounts. We’re not saying you should never close accounts – there are many good reasons why you might want to do so. But, generally, when you close an account, it won’t continue to be averaged into the length of your credit history.
Also, if you frequently open and close accounts shortly afterward, that can push down your average account length, which in turn, can have a negative effect on your credit score. So, remember, it may not be a good idea to close accounts just to “simplify” the number of accounts you’re managing or for another non-financial reason.
The bottom line is this: when it comes to your credit health, a long credit history can go a long way. Just remember, though, that length of credit history isn’t the only factor and it may not be the most important one. As you build a credit history, make sure to pay your bills on time along the way, don’t apply for credit within too short of a timeframe, and keep your credit use low compared to your credit limits.