Should I take out a loan to build my credit?

[questions]

I currently don't have any credit score, but I want to begin building my credit. I was thinking that the best way to do this would be to take out a loan on something and then pay it back so that there's something to put in my credit report. Is this the best way to build my credit? Doesn't make sense that I should take out a loan and the situation? If I take out more loans, will that help my credit score improve more quickly? Also, if I get a bigger loan, will this help my credit score more than a smaller loan will?

[disneysteve]

NO, NO, NO!!!! You do not need to go into debt to improve your credit score.

Use your credit card every month for routine purchases that you would be making anyway.
Never charge more than 30% of your credit limit.
Pay the bill in full and on time every month. DON'T CARRY A BALANCE!

And pay all of your other bills on time every month.

[hamchan]

If OP doesn't have a credit score then OP probably does not have a credit card either.

If you live at the same address with someone who has a credit card and they are willing to add you as an authorized user (they don't even have to physically give you the card or let you use it really) then you will have a score within a month or two. If not then your best bet is to open a secured credit card, use it for something small every month, and pay it off every month.

The best situation is if your secured card will convert to an unsecured one after a certain period of time, so ask about this when you are applying. But even if it doesn't you should then have a credit score which will allow you to get some kind of unsecured credit.

The main thing to be wary of when opening an unsecured card with a relatively new credit history is that you do not want one with a high annual fee. Some cards have as much as a $100 annual fee. You do not want this. Why? Because your credit score is based in part on the average length of your credit history. So if you use a card with a high annual fee to establish your credit then you will have to either close the card, thus lowering your score, or keep paying the annual fee. It is better to get a card with a high interest rate than a high annual fee.

I have had good luck with Capitol One. They have some good cards with low or no annual fee for people who are building or rebuilding their credit. They may have a secured card option as well, though I don't know off hand. Give them a call, tell them you don't have a credit score or credit history and are trying to establish one, and they might be able to find a good card to get you started.

[AggieLife]

Don't be tricked into taking out a loan just to "build credit". You can build credit by using your card for regular purchases and then paying it off each and every month. You risk too much taking out a loan and getting ridden with interest.

+1 to DisneySteve's post about that.

[dczech09]

Overall, I agree with Steve and Eric. You can use a credit card to build your credit by simply paying it off every month.

As far as getting a loan just to build credit? Absolutely not! That is the wrong reason to get a loan.

What is it that you are trying to accomplish? Why do you want a good credit score? So that you can borrow more money? Depending on your response, that will help you determine what direction to go. For myself, I have sworn off debt all together so my credit score means less than squat to me... of course I am not normal either

Some things to keep in mind...
Paying interest does nothing for your credit score. One of the biggest myths out there is that paying interest builds credit. That is absolutely FALSE! There are five factors that go into your credit score and interest is not on the list.

Your credit report is MUCH more important than your credit score. You can a stellar credit report, but have no credit score.

Credit score is all about debt. The only thing that improves it is borrowing money and paying it back early or on time (never late). The only reason to have a credit score is so that you can borrow. It is a vicious cycle.

[bjl584]

This question comes up a lot. A lot of people are under the impression that you need to take on debt to build a credit score. A lot of people also dwell on their credit score as if it the end all be all. Neither thing is true. While a good credit score is important, dwelling on it or obsessing over it is not necessary. There comes a point where there is no advantage to having a higher score than the next guy. You are only going to get a certain rate on a loan no matter what your score is. I agree with the advice already given. Get a credit card, make a few small purchases each month, and pay the bill off in full each cycle. You will start to build a good score in no time.

[klarose]

You guys are all very wise, but I am going to have a disagree a bit.

Personally I've been struggling for 2 years with my credit score.

I have always paid cash for everything including my cars. Well when the time came to buy a house.... It was a disaster.

Luckily I had forgotten my mom made me get ONE student loan with a tiny amount on it, which she has been paying back very slowly, just to build my credit. If I would not have had that loan I would NOT have gotten a house!

Even with that small loan my credit score was low, and my husband had none at all. It has came back to bite us again and again. We had to get a high interest on our house, instead of getting on one those crazy low rates a couple years ago and we had to have a co signer. We don't qualify for any free interest offers, we don't qualify for any good credit cards, we couldn't even get a small HELOC for some home improvements.

Even if your debt averse I still think your credit score is important. Especially if your ever going to be buying a house.

For the last 2 years, we have been doing everything we can to raise our credit score so we can refinance our house before the rates get any higher.

We got "student" credit cards. (All we could get) With $300 limits. We pay them in full every month like the other posts suggested. Since then they have raised our limited to $1,500 and $1,800. I would suggest the capital one journey card.

I've gotten several personal loans and just deposited the cash into my checking and had them direct withdrawal the payment every month.

I have NEVER missed a payment, or been late on a payment. But I still couldn't get a HELOC for a couple thousand just last week.

Our credit scores are now in the 700s. But they said our credit hasn't been established long enough because we have only had one loan is over 2 years old. (My student loan, thanks mom!) All the other loans we paid off quickly. (Debt averse.)

So I disagree with the other posters. You can't just set back and forget about it, or your going to have trouble if you ever need to get any sort of loan.

Establishing a credit score takes a lot of time. At least 2 years I've found, if you honestly don't have any credit. I'd get started right away with the credit card and see what happens. But the banks really want to see 2 different credit accounts that are over 2 years old, if you want to get the low rates. Just from my personal experience.

Once you have credit established, then yes you can just sit back and forget it, as long as your making your payments of course. There isn't much difference if you have a 720 score or an 800 score.

But starting with nothing is hard now days. I had trouble finding anyone to give me a credit card or a loan to build any credit at first. The best option would be getting your name just added to a family members account, and getting a secured or student credit card and paying it off.

If you can't be added to someone's account, then yes you'll need to open your own account.

Just my 2 cents and experience.

[hamchan]

Yes. Exactly. I had a small student loan I had been paying on for over ten years on my credit report. It was the only thing on there that existed prior to my bankruptcy. I finished paying it off earlier this year, which caused it to disappear from my credit report, and since it raised the average age of my accounts considerably my score took about a 30 point hit. So taking out loans and paying them off really quickly won't help you.

[klarose]

Yes. Exactly. I had a small student loan I had been paying on for over ten years on my credit report. It was the only thing on there that existed prior to my bankruptcy. I finished paying it off earlier this year, which caused it to disappear from my credit report, and since it raised the average age of my accounts considerably my score took about a 30 point hit. So taking out loans and paying them off really quickly won't help you.

Yep. So my suggestion is get a credit card and pay if off every month, and get a small loan or LOC and leave it open for a minimum of 2 years, with a very low balance so your not wasting a bunch of money on interest.

That will give you a credit score high enough for the low rate offers. Along with the established credit the bankers want to see proof of.

[klarose]

Oh by the way.

I highly recommend the Capital One Journey card.

No annual fee, 1.25% cash back on everything if you pay your monthly payments.

You can apply online and find out if your accepted in about 30 seconds.
(I've never heard of anyone not getting accepted, BTW.)

They will start your limit off small and increase it automatically after 6 months or so.

http://www.capitalone.com/credit-cards/journey-student/

[hamchan]

I have that card as well, and would recommend it also.

[TBH]

I would NOT advise you to request that you be added to someone else's credit card. Or if you do, make sure you know them very very well and know their financial habits. If you are added to someone's card and they get behind on bills, you will trash your own credit score and also potentially be liable for their debt. Bad bad bad. Don't do it.

I agree with others that it's not necessary to go into debt in order to establish credit. One of those student cards (the Journey card sounds great) with a very low limit is perfect. You don't have to charge very much--even just make one purchase a month on it--and pay it off in full every month.

As others have said, it will take time, because they look at the length of your longest-running accounts. But if you start with one card, and keep it paid off, and gradually request that the card issuer raise your credit limit, that will help a lot. Once you've got that for a year or so you can probably apply for a regular credit card with a much higher limit, but don't let that tempt you into spending more money. Having a high credit score is not worth going into debt over.