Building Credit from Scratch

money growthHow do I build credit from scratch?

Building your credit for the first time can feel a little like the chicken and the egg. You’re going to need to take out a loan or get a credit card, but you can’t qualify for a loan or get a credit card without some credit history.  So what do you do?

First, you’ll want to start with a bank account.  You don’t need a long credit history to open a checking account at your local bank. In fact, you may have one already.  Although though a checking account won’t necessarily help you build a credit history with the credit bureaus, that account may help you get your first credit card or loan from the same provider.  You see, if you already have a history of doing good business with the bank, they know you and value your business.  That existing relationship may carry some weight when it comes time to get your first line of credit.  That is a good first step, but if that’s still not enough, here are a few other things to consider.

Some banks offer credit cards for folks who want to establish, strengthen or even rebuild their credit.  These credit cards are called secured credit cards because you secure the amount you borrow with a security deposit.  In other words, you provide collateral by depositing money in an account with the bank, something the lender gets to apply a portion of, or all should you default on the loan.  Then, your credit line is equal to the amount you deposited.  You won’t be able to touch that money or use it to pay off your balance, and you will still have to prove to the bank that you have sufficient income to pay the credit card.  But, the good news is that the bank will be more confident that you’ll pay them back even without great credit, thereby allowing you to build or rebuild your credit.

Of course, you want to make sure that your lender will report all those on-time payments to the credit bureaus before you apply.  Most banks and credit unions do this, but some retail store cards, for example, don’t, so make sure to check ahead of time.  And if your payment history won’t be reported by the card issuer, you may want to keep shopping for a card that does.

Don’t apply for a bunch of different cards, though, because if you keep striking out, all those hard inquiries and declines aren’t going to help you build a score. In fact, they may make your nonexistent credit score worse!

Then, there are prepaid cards.  A prepaid card allows you to load the card with a cash amount ahead of time to spend later.  Prepaid cards are great for people who need a Visa or MasterCard to make a purchase and can be a terrific gift idea, but they won’t help establish credit.

Another way to build credit is to see if there’s, someone who might be willing to co-sign a loan with you.  This can be any adult who is credit worthy, including your parents or spouse. When someone cosines a loan, you get the benefit of their good credit history, and this may help you get approved. You can then build your own credit with a good history of payment on the co-signed account.  However, keep in mind that whoever co-signs the loan for you is taking on a really big financial responsibility.  In the event that you don’t pay, they will be responsible for paying back the debt. Therefore, it’s not something you should ask for lightly.

When you do get credit extended to you, it’s very important to keep managing it carefully.  Even after you’ve built a solid credit history, make sure that you keep the good habits you learn for the rest of your credit life. This will help you build a long, positive credit history that will eventually result in a really good credit score.


Confused by Credit Terms?

Have you ever tried to read those little “Terms & Conditions” updates you get in the mail every so often?  Or worse, have you ever tried to make any sense of the various ways that your credit card interest is calculated?  Maybe you’ve never had a credit card before and you’re confused by different things on your first statement?

While all of those different sections, boxes, and percentages may be a bit confusing at first, here’s a quick guide to what they are and, more importantly, what they mean for you:

  • Balance:  The balance on your credit card is the total amount that you on on the card at the time the statement was issued.  This balance includes any purchases that you have made before the statement closing date, less any payments you’ve made, and plus any interest charged on the account for the previous month.
  • Interest:  Interest is the amount that your credit card provider charges you for carrying a balance on the card each month.  The amount of interest charged depends on the APR (annual percentage rate) that is attached to the card.  This APR is determined based on factors in your credit report – the better your credit score, the lower the APR you will likely be charged when you apply for a new credit card.
  • Minimum Payment:  The minimum payment is the lowest payment that you can make on the card to keep your account current and in good standing.  Typically, the minimum payment is a percentage (2-4%) of the total balance due, or a set amount (like $25.00), whichever is greater.  It’s important to remember that paying only the minimum payment on your credit cards will cost more money in the long run, so even if you get something on sale, you’ll likely pay a lot more for the item over time if you only make the minimum payment.  (The amount of time that it will take to pay the card off if you make only the minimum payment is shown in a special section on your statements.  Take a look at this section and pay close attention – sometimes it can take years to pay off a balance!)
  • Grace Period:  The grace period is the amount of time that you have after you’ve bought something with the card to pay the balance in full without incurring any interest charges.  Federal law requires this grace period to be at least 21 days, however, some credit card providers will allow up to 45 days, depending on your credit terms.
  • Payment Due Date:  This is the date that you must make a payment on your credit card to keep your account in good standing.  Failure to make your payments by the due date can result in late fees or suspension of your credit privileges with your credit card provider, so it is important to make your payments on time, every time.  If you make payments by mail, allow seven to ten days when you mail your payment to ensure that it arrives on time.  If you make your payments online, don’t wait until the last minute – you run the risk of the payment not posting in time, or worse, their website may be down for maintenance, etc., and your payment could end up being late.
  • Annual Fee:  Some credit card providers charge you an annual, monthly, or other fee just to carry their credit card.  These fees are typically charged whether you carry a balance on the card or not and, if you aren’t careful, can even push the balance of your account over the credit limit.  These fees are sometimes offset by benefits that come with the card, however, pay close attention to the amount it will cost you to have the card when you apply, as it may not be worth the additional cost.

Of course, these simple explanations don’t cover all of the terms, conditions, and other information that comes along with your credit card accounts, but if you know the basics, you’re off to a good start.  Always, always pay attention to the terms and conditions of any account before you apply AND study those monthly statements that you get in the mail or via email to make sure that everything is as it should be.

Maintain Your Good Credit by Managing Your Credit Cards Responsibly

Got a good credit score?  If not, do you want to improve your credit score?  Without good credit, getting a credit card, a car loan, or a mortgage is difficult, and even if you are able to get the credit you seek, you’ll have to pay a higher interest rate than someone who has good credit.

One of the easiest ways to maintain your good credit score, or even to improve a less than perfect score, is to manage your credit cards responsibly, and the good news is, you can start today!

Establish Credit

If you have no credit history, or even a bad credit history, the first thing you need to do is to actually establish credit.  The easiest way to establish credit is to get a credit card.  Even if you’ve been denied credit in the past, or have bad debts, charge offs, or late payments on your record, you can still get a credit card.

Begin by comparing the different types of credit cards available for your current credit score – don’t know your credit score?   Find out your credit score with this free trial.  Once you know your credit score, simply compare credit card offers based on your current credit score, and choose the one that has the lowest APR, charges little or no annual fee, and offers the best opportunity to improve your credit score.  (If you have bad credit, you may need to consider a secured credit card, but even these cards report regularly to the major credit bureaus, and can help you improve your credit score over time.)

Once you’ve decided on the best credit card in your scoring category, simply fill out the secure online application and await the delivery of your credit card.

Keep Track of Your Purchases

Once you have succeeded in obtaining a credit card, you actually do want to use the card – just make sure that you use it wisely and keep track of your purchases.  Never charge more than 2/3 of your total credit line, which means if you have a $300 limit, never have a balance greater than $200.  Carrying a balance greater than 2/3 of your credit limit can actually harm your credit rating.

Pay Your Bill on Time Every Time

In order to maintain a good credit rating, and even to build your credit over time, you need to make sure that you pay your credit card payment on time, every time.  Paying late, or even missing your credit card payment, can negatively affect your credit score, and will can stay on your credit report for up to seven years.

And, if at all possible, always pay more than the minimum payment.  Not only does this reduce your balance faster, but as some credit card providers look at your ability to pay, paying more than the minimum payment can actually lead to an increase in your credit line.

Ask for a Credit Limit Increase

Over a period of time, and with a responsible history of managing your credit card, many companies will automatically increase your credit limit.  However, if this is not the case, you can also request a credit limit increase simply by calling the credit card issuer and speaking with a representative.

Increasing your credit limit is normally a good thing to do, as the higher amount of credit available, combined with the lowest overall credit usage, can significantly raise your credit score.  However, be advised, if you increase your credit limit, and also increase your credit usage by charging more purchases to your card, you may not see the desired improvements in your credit report.

Adding New Credit Lines

Once you’ve proven your credit worthiness, you will begin to see an improvement in your credit score, and you may even begin to see new credit card offers arrive in your mailbox.  Opening a new line of credit as the need arises is a good rule of thumb – for example, if you need to buy a new washer or dryer, replace the dishwasher or refrigerator, etc., then applying for a new line of credit is a necessity.  Just remember to pay it off as quickly as possible to keep your overall debt limit as low as possible.

It’s also important to keep in mind that too many credit inquiries on your credit report can also negatively impact your credit score, so once or twice per year should be your limit!