3 Ways to Build Perfect Credit from Scratch

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This post was originally published in March of 2017. Here’s the new and improved version…

 

Today you’re going to learn how to build perfect credit from scratch!  This lesson is perfect for the college student or recent grad looking to start her adult life right.

Before we talk about how to build perfect credit from scratch, we should talk about why it’s important to build perfect credit at all.

Why should you care about having perfect credit?

In our experience, most college students only know the negative side of credit scores.  Having bad credit can keep you from renting an apartment, which is just embarrassing.  It can also prevent you from buying a house one day.  And before you say, “oh, that’s ok, I’ll probably always rent,” you should probably check out our 3 Reasons to Buy Real Estate (even if you don’t want to own your home!).

And, who knows, you might want to start your own business one day and need a business loan.  You can’t get one with bad credit.

But it’s not enough to just not have bad credit.  You want to build perfect credit to take advantage of the benefits that come with a great credit score!  The main benefit is that the better your credit score, the better your interest rates.  Sound like not-a-big-deal?  Well, it is a big deal!  It’s a huge, exciting deal!  Here’s why: it can save you a crap-ton of money!

How perfect credit saves you money

Let’s say you’re buying a $20,000 car and need a 4-year auto loan.  According to myFICO.com, if you have a meh credit score (620-659), you can probably get a 10.3% interest rate.  Your monthly payments would be $510, and you’ll end up paying $4,487 in interest.  But if you have a great credit score (over 720), you can get a 4.056% interest rate.  This would make your monthly payments just $452, and you’d end up paying just $1,700 in interest.  Bam!  You just saved $58/month and $2,787 in interest.  Think of the more important things you can do with that money!

What if you decide to buy a house?  Say you decide on a $250,000 house with a 30-year fixed-interest-rate mortgage.  Scenario 1: You have meh credit (side note: you need at least meh credit to even get a home loan!).  Your interest rate would be around 5.565%, your monthly mortgage payment would be $1,430, and you’d end up paying $264,687 in interest.  Yikes!  Scenario 2: You have excellent credit (over 760).  Your interest rate would be around 3.976%, your monthly mortgage payment would be just $1,190, and you’d end up paying only $178,429 in interest.  You just saved $240/month and $86,258 in interest.

On your car and your house, you’ve saved $89,045 just by having good credit!!!  You can’t not be excited about learning how to build perfect credit now.  So let’s do it!

1. Get a credit card and use it responsibly

The easiest way to start building credit is to get a credit card.  Why?  Because credit card companies offer credit cards to everyone, even people with no credit history!

In fact, credit card companies love offering credit cards to students.  Most students don’t know how to use credit cards responsibly, so the student puts too much debt on the card and spends years and years paying back that balance plus the high interest rates.  So the credit card company gets to collect interest payments from students every month for years!  It’s a big win for them.

But, if you use your card responsibly, you turn it into a big win for you!  It lets you build your credit, teaches you to spend less than you make, and can even give you rewards if you sign up for a card with a rewards program (just make sure there’s no annual fee if this is new to you).  Here’s how to be responsible:

• Find a 0% APR card – 0% APR basically means 0% interest. It’s usually an introductory offer for a year or two, so make sure the card is paid off in full before this period expires.
• Use the card – this is the only way to show that you can borrow money and successfully repay it, which builds your credit history. So make your minimum payments and allow a small amount to roll over every month until your 0% APR period runs out.
• Make sure your payments are made on time – late payments will hurt your credit, which is the exact opposite of what we’re going for here. And if you have a 0% APR card, even one late payment can change your interest rate from 0% to like 18%!

PS: Check out our 3 Credit Card Hacks You’ve Got to Try to Believe for more awesome credit card tips!

2. Put your phone plan in your name and pay your bills on time

Once you have some established credit history through using your credit card, you should be able to put your phone plan in your name (even if mom or dad still has to help with part of the payment).

Cell service providers are willing to work with you even if you don’t have much credit because they don’t have much to lose.  For example, if you end up being a terrible customer and never pay your bill, they can simply disconnect your service.  Of course, doing that would put a huge black mark on your credit record, so the cell service provider is pretty sure you’re not going to risk your credit score on the relatively small monthly payment.

So it’s very different from, like, a car loan, where the lender would have to give you several months to get caught up on your payments, then find a way to physically repossess the car.  And even then, the car is probably worth less than you owed on it, so the lender gets screwed.  That’s why you have to build up your credit history on these smaller bills to prove that you can handle bigger bills and loans.

Phone plans are the perfect small step to prove that you can pay your bills on time every month.  And you must pay on time every month to continue to build perfect credit.  A late payment could negatively affect your credit score and set you back further than when you started.

Automating payments

You may want to consider automatic payments if you’re nervous about paying on time.  You can use your bank’s online portal to create an automatic, recurring payment to your cell provider.  This means your bank would automatically send a check or wire transfer payment to your cell provider every month.  You get to specify the date and the amount of the payment one time, and your bank will take care of it every month so you don’t have to remember to pay it!

Now if your bill always changes month-to-month because of extra data usage or whatever, you can set up auto-pay with the cell provider instead of your bank.  In this case, you would give your cell provider your bank account info, and they would automatically withdraw the correct amount at the correct time every month.  You just want to make sure you review your bank records every month to make sure the cell provider is taking the correct amount and not accidentally over-charging or double-charging you.

3. Put utilities in your name and pay them on time every month

Are you noticing a theme?  To build perfect credit, the trick is to put monthly payments in your name then make sure you pay them on time.

Utilities are next: electric, gas, water, sewer, and trash.  Like phone service, utility providers don’t take many risks, even with a customer with very little credit.  They can just disconnect service if you don’t pay.  Also like phone service, the amounts are usually pretty small, so the utility companies are pretty sure you’re not going to risk your credit score by failing to pay for their services.

Again, if you’re concerned about paying on time, take advantage of automatic payments, and never worry about it again!

What about student loans?

Unfortunately, student loans are not a great way to start when you want to build perfect credit.  It’s unfortunate because most college students need them anyway, and think that they will be a good credit score starter.  There are a few reasons they are not in the top 3 ways to build perfect credit:

• Unlike phone and utility providers, student loan lenders can’t simply disconnect your service if you fail to pay.  In fact, your payments don’t usually start until college is complete, so if you fail to pay your student loans, there is no simple fix for the lenders.  They can ruin your credit, which would make your life miserable.  They might sue you to repay the loan, but that could take years in court and high legal fees, so they may not even do that.  Lending to you is a huge risk for them.
• Because of this huge risk, lenders aren’t going to give a loan to someone with little-or-no credit history.  Instead, they will require a cosigner with a long history of good credit (mom or dad, most likely) to guarantee that you’ll repay the loan.  If the loan isn’t repaid, the lender can ruin your credit and your cosigner’s credit.  Plus, the lender needs proof that you have a steady income to repay these loans.  Of course you don’t!  You’re a college student.  That’s the other reason you almost always need a cosigner.
• Since you don’t typically start paying on these loans until after graduation, you have to wait all those years before you can even start making payments on time to build a credit history with your student loan lender.  If you’re consistently paying your other bills on time all through college, you’ll have a fair credit history by the time you graduate, so the student loans aren’t really a from-scratch option.

Consider today’s lesson concluded!  Homework: go start building your perfect credit 🙂

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How did you start building your good credit?