A high credit score is very important when you want to borrow money at the lowest interest rates possible. But how do you get there from no credit history or begin to fix bad credit. The answer is fairly simple and of course involves our friend the credit card.
The secret to raising your credit score with Credit Cards is to get one and put a small regular purchase on it, like your gas or your groceries. Then make a payment for this amount as soon as you can after the purchase. Pay it off online or at the bank, even before you get a bill.
To build your credit rating, the size of the loan or the size of the payments doesn’t matter.
Lenders look for regular payments made on time. Customers are always surprised when they apply for a loan and I tell them they don’t have a much of a credit history. “But I had big loan for (insert large amount here), and I paid it off in only three months.” I have to explain that all this shows is that they made three payments on time. It would have been better for their credit history (while admittedly costing more in interest), if they had kept the loan for the full term. If they had made twelve payments on time this would give future lenders a greater indication of their ability to handle loan payments responsibly. A long track record is better than a short one. And you don’t get “extra points” for paying something off early. All your benefit comes from paying on time. I agree you should pay off your loans as quickly as possible to avoid unnecessary interest charges, but just be aware that you are not building a deep credit history by doing that.
Getting a credit card, using it sparingly and paying it off before you are charged interest is the best of both worlds. I am not suggesting you should charge your gas or groceries instead of using your disposable income, I am just suggesting that you run the transactions through your credit cards. Charge the purchase and then make the payment against the card with the cash you would have spent anyway. This builds a good credit history by displaying a track record of regularly using credit and paying it back as agreed. Then when you are ready to borrow for a larger purchase like a car or a new home, the banks will throw money at you, and at their lowest rates too!