As more businesses use your credit history to decide whether to do business with you, your positive credit history is more important than ever. You need good credit in order to get approved for a mortgage loan, rent an apartment, buy a car, qualify for a good insurance rate, and sometimes even get a job.
If you have bad credit—or no credit—your goal is to build a positive credit history so you can have your applications approved easily. Building a positive payment credit history isn't magic. You can’t directly add things to your credit report, even if they are bills you pay each month. Instead, you must depend on your creditors and lenders to send updates to the credit bureaus based on your account history.
There are three major credit bureaus in the U.S.: Equifax, Experian, and TransUnion. Creditors that you have accounts with may report your credit history to one or all three of the bureaus, based on their existing relationships with that bureau. Bureaus don’t share information under normal circumstances, so there’s a chance that some of your accounts may only appear on one credit report.
How a Positive Credit History Is Built
Every month or so, the credit card issuers and lenders you have accounts with send accounts updates to credit bureaus. They tell the credit bureaus your current balance, payment history, and other details about your accounts. This information is compiled into your credit report and used to generate your credit score when your or businesses request it.
The information sent by your creditors helps you build a positive credit history as long as your account details are positive, meaning that you're making timely payments and maintaining healthy credit card balances.
It takes time to add positive information to your credit report, so don't expect it to happen overnight or even in a few weeks. You can help the process by being financially responsible and patient with the process.
What if You Have No Accounts?
You need open, active, positive accounts to build a positive credit history. If you don’t already have open accounts, start by applying for the types of credit cards or loans that are for people with no credit or bad credit, like a secured credit card or retail store credit card. If you can’t get approved on your own, a relative or friend may be willing to co-sign for you or make you an authorized user on one of their credit cards to help boost your credit. If the primary cardholder has a positive payment history, you might see a boost in your credit score.
Beware of schemes that claim to help you improve your credit score by adding you as an authorized user to a stranger's account. Such a credit card piggybacking tactic could cause you legal troubles.
Use Your Accounts the Right Way
While you’re trying to build a positive credit history, you should avoid the things that will hurt your credit, such as late payments on your bills, high credit card balances, and too many credit card applications.
Don't be afraid to start small. Expect to get only small credit limits, and loan amounts to start, i.e., less than $1,000. Creditors and lenders will give you more credit once you’ve shown that you can be responsible for a little bit. Once you've successfully opened a credit card or loan, don’t use up too much of your available credit, and pay back what you borrow on time each month.
Accounts That Are Inaccurately Reported
If your credit report contains negative accounts that should be positive, you can use the credit report dispute process to have the information corrected. For example, your credit report may show that you were late on a payment that you’re certain you paid on time. To correct credit report errors, you need to send a dispute letter to the credit bureaus citing the error and providing a copy of any proof that the information is indeed incorrect.
The bureau will investigate and revise your credit report if the investigation supports your claim. If not, you can follow up with a dispute directly with the business that reported the error.
Some Bills Don’t Help Your Credit
Not all the bills you pay each month are regularly reported to credit bureaus. For example, your cell phone, cable, and auto insurance payments don’t help you build a positive credit history, even when you pay on time. However, if you default on these payments (by becoming several months delinquent), and your account gets sent to a collections agency, the debt could be added to your credit report and hurt your progress toward building a good credit score.
Watch out for credit repair scams and ploys about improving your credit score. Credit repair companies don’t have any privileges with your credit history that you don’t also have.
Building a positive credit history isn’t as hard as it seems. Open up an account, and pay the bill on time every month, and you’ll be building a positive credit history. With time, your credit score will improve, and you’ll be able to obtain higher credit card limits and bigger loans.