How to Build Your Credit It’s a common financial predicament for most 20-something-year-olds: You need credit to get credit. But even if you’re older and have been through some credit-wrecking havoc in your life, you could face the same issue. For millions of young people just starting out in their financial lives, getting approved for a credit card, auto loan, mortgage or other line of credit can pose a challenge. If you don’t have a record of making payments or managing credit, lenders don’t know whether you’re reliable. They’ll likely turn you down or charge you higher interest rates until you can prove your creditworthiness. Better to establish and build a credit report for yourself now before you need to borrow money. This is what it will take to establish a credit score, you must have at least one open account that you have paid on time for a minimum of 6 months (but make sure that they report to all 3 credit bureaus and that they update often). But before you open or apply for any type of credit get some advice. Don’t start applying for credit without asking someone for help, you may do more harm than good if you don’t understand how it all works. However, if you have been denied credit there is still some hope. Make sure that you do not have any open collections on your credit report and that there are no mistakes on your report. You are allowed one FREE credit report every 12 months from all 3 credit bureaus (Equifax, Experian & TransUnion). To get your free credit report, only use this website: annualcreditreport (if you need help reading your credit report, always contact this office and someone here will gladly help you). Your credit score, however, isn’t included in your free annual credit report. In most states, the credit bureaus each charge around $10 for your score. So if you were unable to establish trade lines you still may have other options. You may be able to use non-traditional trade lines (you must have a minimum of 3). Non-traditional trade lines can be car insurance, utilities, rent, childcare, rent to own accounts, Buy Here Pay Here, if you borrowed or purchased items and repaid someone in payments for that item, etc. But, you must have paid all of the above on time and you cannot have more than one 30 day late pay in the past 12 months. Experian now collects rental payment histories, so some landlords submit reports to credit bureaus however, most just report tenants with negative histories. It’s not enough to just establish a credit report. When you get credit, it’s important to follow these key steps to net the best possible score: • Make your payments as soon as you get your bill 1. Avoid waiting until the last minute. If you push it to the due date, any little snag could cause you to be late such as no Internet access, ran out of stamps or got lost in the mail. 2. Making your payments on time is one of the main factors that determine your credit score. A single missed payment can drag down your score, and the incident can stay on your record for up to seven years. 3. Late payments can also cost you extra in fees as well as trigger a higher interest rate. Also try to pay more than the minimum required on your loans and credit cards each month. You’ll pay them off sooner and save a bundle on interest. • Don’t max out your credit cards 1. Lenders look at how much available credit you actually use. Keep your credit card use to less than 30% of your credit limits. 2. If your card carries a $500 limit, try to keep your spending below $150-even on a secured credit card. Not only will this strategy help you get the best possible rates, it can help you avoid getting in over your head in debt. • Don’t carry a balance 1. One of the biggest myths about credit is that you need to carry a balance month to month in order to build a credit history. Not so. In fact, credit scores don’t even distinguish between those who carry a balance and those who don’t, according to Consumer Credit Counseling Services. Go ahead and use your credit card each month, but stick to a routine of using it one time only each month for the same thing each month (i.e. filling up your gas tank once per month). You will save money on interest charges and you’ll be less likely to get into trouble down the road. Seven Strategies to Build Credit If you’re starting from scratch, these seven strategies can help get your credit history off the ground: 1. Open a savings and checking account. Although they aren’t considered “credit,” these accounts may show up on your credit report. Lenders view savings and checking accounts as signs of stability. Over time, your withdrawals and deposits will show that you can handle money responsibly, and that you have reserved cash to cover payments. But be careful not to bounce any checks, which will scuff up your report. 2. Pay all your bills when you get them. Credit cards, student loans and other debt aren’t the only bills that can impact your credit report. Your Cell phone, cable TV, utilities and Internet service may show up as well, so it’s important to stay on top of all your bills. Years of on-time payments may or may not get reported. But one wrong move and –bam!—it’s on your credit report. A great way to make sure you don’t miss any payments is to pay your bills electronically. Many banks now offer the service for free, and you can use helpful on-site calendars or financial software, such as Microsoft Money or Quicken to schedule some bill payments automatically each month. You could also go with a reminder service, such as Memo to Me or Rememberit, that notify you via e-mail or cell phone when it’s time to write a check. 3. Make a secure start. One of the best ways to build a credit history from scratch is with a secured credit card. These cards allow you to make a deposit with a lender (such as your bank or credit union), and the amount usually becomes your credit limit. The issuer takes on zero risk because if you don’t pay on time, it can dip into your account to cover the bill but it may ruin your credit because you are now a risky borrower for not paying on time. Most issuers require a deposit of $300 - $5,000. You build a history just as fast with a secured card as with a regular one. You’ll want to shop around for the lowest fees and interest rates on a secured card. Avoid those that charge an application or processing fee. And make sure the issuer reports to the three major credit bureaus—some smaller banks may not. After making payments on time for a year with a secured card, you should have an adequate history to switch to an unsecured card and you should be refunded your initial deposit. 4. Get a credit card in college. This may seem like irresponsible advice for us to give. After all, the average college student graduates with four credit cards and carries a balance of nearly $2,200, according to a recent study by Nellie Mae, a student loan provider. But credit cards are pretty simple to come by in the ivy-covered halls. Lenders practically beg college students to take cards off their hands. If you can establish a reliable credit history while you’re still in school, you’ll be prepared for when you want to buy a car or a house after graduation. Try to limit yourself to one card. Learn more about getting your first credit card, and how to shop for the best deal. 5. Get store credit. Consider getting a card to finance purchases at your favorite retailer or gas station. Qualifying for these cards is generally easier. But be careful—too many of these cards can actually hurt your credit score. Shop around for the best deal and read the terms carefully. Watch for annual fees and other charges, and make sure you know how long you have to pay the balance before interest kicks in. 6. Borrow someone else’s good credit. If you simply use your parent’s credit card, your credit history will remain a blank page, no matter how responsibly you manage your spending. Ask them to add you as an authorized or joint user, however if they don’t make the payments you will be required to. Also, as soon as you have established credit for yourself have them remove you as a user. Remember that if they owe more than 30% of their credit limit that may hurt you and not help you. (Make sure that whatever card they are adding you to reports to all 3 credit bureaus and some only report such users if they are married to the original account holder.) And also make sure they don’t owe more than 30% of their limit. Another thing to look for is how long they have had the account open. You will want to be added to the one that they have had open for at least 24 months. Of course, you’ll want to make sure they really do have good credit because any of their mistakes would then become yours too. Getting someone to cosign a loan is another way to qualify. Make your payments on time and you can build a solid payment history. But, again, if you miss a payment, it’s not just your credit that will suffer—it’ll show up on your cosigner’s report as well. 7. Don’t open too many new accounts at once. When it comes to building your credit, patience is a virtue. It takes time to create a solid record of consistency in making payments, to demonstrate your creditworthiness. Start off slowly with one or two accounts. Use them responsibly for at least 6 months to one year before applying for another. If you need it. Applying for too many accounts in a short period of time could be a red flag to lenders, according to Equifax, one the main credit bureaus, especially if your credit history is less than three years old. Even if you don’t qualify or open an account, each application for credit can remain on your report for two years. (It will be counted as an inquiry which can have a negative impact on your credit report). Applying for too many of the same kinds of accounts can also drag down your score. Lenders like to see that your money management skills are well-rounded. A checking account, a secured credit card and a co-signed car loan, for example, show more versatility than a pocket full of Visa’s. A good habit: Use your card to make small purchases and pay of the balances each month. “By charging a small amount on at least one card and paying the balance on time and, ideally, in full, you will show that you can manage credit without charging more than you can afford to pay. If you decide that you no longer need a particular account, don’t close it! The age of the account affects your score, so keep the oldest ones open to show a long credit history. For more information on managing your money, saving and budgeting and smart money tips, contact us so we can give your reputable resources and guidance.
Posted on: Tue, 08 Jul 2014 12:11:01 +0000
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