Building a solid credit history now can help you qualify for a pre-approved mortgage at some of today's lowest rates. In our current, bizarre real estate market, having your financing squared away before you make an offer is pretty much essential. However, with a thin credit file, lenders may require higher down payments and/or steeper interest rates.
Unless you qualify for an unsecured student credit card or credit union account, your best option is a secured credit card from a trusted lender. If you can afford to park a few hundred dollars in a linked savings account, major banks will give you a matching line of credit. You'll pay up to $50 per year for the privilege, but you'll gain a head start on building a solid credit score.
To really benefit from this strategy, use your card every month to buy something very small, like a pack of gum. Utilizing just 1 percent of your credit is enough to put your account on a reporting agency's radar. Leaving an account completely unused can actually hurt your credit, based on how some banks interpret the data. Just remember to make regular monthly payments to avoid finance charges and service fees.
Paying a bank for a privilege of using your own money as collateral sounds ludicrous. However, when your secured credit card reports an active trade line with low credit utilization to all three credit bureaus, you can significantly boost your credit score enough to save yourself thousands of dollars over the duration of your home loan.
Private-label gas and retail credit cards come in at a close second on this list. They're less risky for banks to issue, so they're generally easier to get when you don't have other established credit cards. However, not every card reports to all three credit bureaus. Plus, you may need to make routine charges to keep your account active. Getting your account cancelled for inactivity can negate the otherwise positive impact on your credit score.
Although competition has made prepaid debit cards less expensive and more convenient, remember that they don't report activity to the credit bureaus. Executives from American Express have told reporters that they intend to use data from their debit card customers' usage patterns to determine future credit card eligibility. However, using one won't impact your credit score.