It is a strange and seemingly unfair situation that in order to build credit, you have to have a solid credit history. Hmm. How do I get my credit built if I need a built credit to get credit extended to me. (And yes, that sentence was supposed to sound that confusing.) Here are some ideas to increase your credit score and improve your borrowing power.
1. A Joint Account. Sometimes called “Piggybacking”. This is where you sign on with another person who has solid credit as a co-signer. Their good credit actually rubs off on you. Just be sure you keep up your end of the deal so you don’t end up bringing their credit down!
2. A Secured Card. I always suggest that you start with your personal bank when shopping for these. Some plans may be better than others, but the bank’s reputation is the most important factor in the end. An example of a secured card is one where you put money into an account, say $1000 and then access that money through the card. Although it is technically a credit card, not a debit card, it is secured because you define the credit limit by the amount of capital you put in the account.
3. Gas Station Credit. Yes, gas stations offer their own credit accounts and the requirements for these cards are usually less strict than major credit cards. Use the card and make your payments on time and your credit will improve.
4. Rent to Own. This is a great option if used wisely. You can purchase furniture, clothes, kitchen ware, even cars and houses this way. Make sure you are working within a deal that gives you “same as cash” pricing so you don’t end up paying way too much for the stuff you buy.
5. Buy a Car. If you need to buy a car, do so with a large down payment. The bank will be in a safer position and so will be more likely to approve you. Even if you can afford to buy a used or new car with cash, use the financing just to build your credit.
6. Purchase a CD. I’m not talking about buying some new music. Purchasing a CD from your bank will give you another asset you can choose to use as collateral for a loan. The bank has the CD so if you default, they have their principle in hand. The risk is gone and so your approval for the loan is likely. This is similar to a secured card in that the collateral exists before the loan is created.
7. Open Bigger Credit. As your credit improves, continue to grow your portfolio. Apply for major credit cards once your credit score reaches 650. You will be in the lower end of the spectrum, but you will likely be extended credit nonetheless. If you can wait until your score hits 720 or so, you will likely secure better deals from the major credit companies. You can always start out with a higher interest rate or lower credit limit and work towards improving things as you move forward with the creditor. In time, you will have an account that meets your needs and builds your credit.
8. Two Details That Matter. There are two major players in your credit score. Both of these important factors are controlled directly by you.
a. Pay your bills on time. Always. No excuses.
b. Do not “max out” your credit cards. In fact, don’t use more than 10-25% of your credit limit on any given credit account.
9. Department Store Credit. Like gas stations, the credit requirements for most department stores are not as strict as those of major credit card companies. Be careful though, as department store credit tends to come with very high interest rates. Be sure to pay off your purchases as soon as you can.
10. Pay in Full. Use your credit cards. Just be sure to pay them off each month. It was once considered a good idea to leave money on the accounts as a means of building credit. This is no longer the case. The credit companies like an account which is used and then paid in full. The cycle will start to build purchasing power with the credit issuer. They’ll see you want to use their card, and will give you a better credit line or interest rate as a result. This will reflect well on your overall credit score.
11. Bonus (and Important) Idea. Make sure that the credit accounts you choose are actually reported to the three major credit bureaus. If the results of your work are not being reported, get them reported. Without their input, your credit will go nowhere. Be sure to check your report every six months to check on improvements. Do not over check, however, as that may make a potential lender nervous.