While cash may be king in some parts of the world, establishing an excellent credit history is a necessity for societies driven by credit. After all, good credit means you can get a mortgage, reduce your insurance rates and rent an apartment. However, there are a number of traps that can easily be fallen into and some misinformation about the process.
When it comes to building your credit from nothing, there are four things to consider:
- Do you already have a credit history?
- What will be your first kind of credit?
- How can you set up an automated system?
- Are you ready for more credit?
Do You Already Have A Credit History?
It doesn’t matter if you’ve borrowed money or not; you may already have a credit report if you’ve had a utility or phone company report an unpaid item to your credit report. These companies will only report the negative information to your account – never good information to establish good credit behavior.
Medical bills are also commonly seen on a credit report. If you have set up an installment plan with a hospital, the hospital reports it as a loan. If you fail to pay the loan, the medical bills go into collections on the report.
Go to AnnualCreditReport.com to find out about your credit history. The site provides you with access to all three credit reporting agencies – Experian, Equifax and TransUnion. With AnnualCreditReport.com, you need to provide them with personal information such as a social security number, your name, address and previous address (if at your current address for less than two years).
You can also mail a request for copies of your report to each bureau.
There are several things to look for in your credit report:
- Be sure to see if you even have a credit report. If you’ve never had to borrow money, then you may not have a credit report. When you’re trying to establish credit, this is the best situation for you to be in.
- If you find you do have a credit history, you want to be sure it’s not because you became an identity theft victim. If there are accounts you’ve never opened in your report, reach out to the FTC and your city’s police department. The FTC will provide you with a detailed plan on repairing the credit history. Identity theft cleanup will take time, so patience is a virtue here.
- You need to see if there is a history of credit issues. If you’ve paid a bill late or haven’t paid bills at all, you could have problems getting a line of credit. Again, time with fix the problem, but you must be strategic in repairing your credit. Your behavior will need to change, which means making timely payments on all your bills.
What Will Be Your First Kind Of Credit?
When you’re establishing your credit, you may not know which type of credit is best first to get. You do have options at your disposal, but which one is best?
Gas Station, Grocery or Department Store Credit Cards
All gas stations, grocery stores and department stores have a credit card they offer their customers. These cards tend to have low balances offered on the cards – that can only be usedat that particular kind of store. Unless you have some type of credit history, it’s unlikely you’ll get credit from other places.
These cards tend to be much easier to get than the typical cards.
Two things to remember about these kinds of cards:
- Never carry over a balance on these cards, as the interest rates are two times higher than typical credit cards.
- Never sign up for a card with a yearly fee. This is the first card you want to keep active as long as possible.
Secured Credit Card With No Fee
If you’d rather not use a gas, grocery or department store card, you can always get a secured credit card. The amount of deposit on the card is your credit card limit. Many of these secured cards have a limit of $200 to $500, but they can assist you in establishing a credit history.
Again, you want a card with no annual fees or maintenance fees. You want a card that offers rewards. Over time, you can upgrade the card to a rewards credit card, but you must demonstrate good credit behavior. A call to the bank can get this done.
Never cancel the secured credit card since credit history length has a huge role in the score. When you upgrade the credit card, the bank will do one of two things with the initial deposit:
- Refund it
- Apply it to the next statement balance
The majority of Americans with little to no credit history can attain access to a secured credit card. Make sure to not spend more than 10% of the card’s limit to boost your score. And, make sure you pay your bills on time every month.
Savings Secured Installment Loans
You can also establish credit by getting a savings secured installment loan, which is when you make monthly payments. The bank then deposits it into a CD, and when the term is over, you get the CD minus the bank’s interest.
Most people can attain a savings secured installment loan because the bank isn’t risking any money. Since a lot of banks don’t offer these kinds of loans, you may need to do a little research to find one that does. They are a great option and can help you to establish credit.
Federal Student Loans
If you’re a U.S. student, you can attain a federal student loan to help pay for your college. Subsidized Stafford Loans have an interest rate of 3.76% with payments that you can defer during college. They also come with low origination fees.
Bear in mind that building your credit history doesn’t happen until payments are being madeon the loan. If you need financial aid for school, this may be your best option. They’re also the least expensive way to borrow money for people who have no credit.
Authorized User (Proceed With Caution)
Another good way to build your credit is to have someone put you as an authorized user on their account. However, if they make late payments, go beyond their credit limit or into collections, their negative behaviors are yours as well.
People who have good credit now could end up having financial problems, even your parents. Approach this idea with some caution.
Make sure that the bank is reporting the credit card usage to the bureaus. If they’re not, you could take on risks that show no rewards. Talk with the issuing bank about their policies before going through with this option.
How Can You Set Up An Automated System?
After you’ve come up with the right kind of credit, you need to make payments all the time on time. Most credit card companies will allow you to set up an automated draft to take out just the minimum every month. This will help you to make those timely payments.
A great way to build your credit is to have a low credit utilization rate. For instance, you can use a credit card to pay a single, recurring bill each month (think Netflix, Hulu, cell phone, etc.) Then, you can automate the credit to pay the bill off when it comes due. Pay it off each month. Don’t use the card for other things or you may end up paying interest.
The majority of installment loans will let you set up an auto-draft monthly payment schedule that comes right out of your checking account. The lender may even provide a discount for the service.
With auto-draft, you can help yourself to establish good credit behavior. Be aware that you need to have funds in your account to pay your bills automatically.
Are You Ready For More Credit?
After a year to two years of responsible credit, you’ll have gone from no credit to a great credit score. Once you’ve attained a good credit score, you’ll get offers for more credit from various banks. As the offers come rolling in, you can be assured that it’s a sign that you can take on more credit.
However, you need to choose carefully, which kind of credit to apply for. Are you looking for credit that provides rewards? Are you looking to borrow funds for a vehicle or home loan? Do you want to maintain background credit?
Putting Credit On Autopilot
If you’re going to maintain a good credit scores, you need to steer clear of negative marks. This means using your credit card each month and pay a monthly bill with it. For instance, you can set it up so that your cell phone is paid each month with the card and then you pay it off. If the first credit card you got with a secured credit card, ask the financial institution if it can transfer your account to an unsecured line after a couple of years.
You can also ask the bank to raise your credit limit, which will help to hold hotel rooms or vehicle rentals.
Using Credit To Get Rewards
If you can responsibly manage your credit, consider applying for cards that give you rewards. These can pay off greatly if you pay off the bills each month – in full. Many rewards cards offer either cashback options or points. Some users decide to use a single card that offers the cash rewards options. Others use credit cards that give them travel bonus points.
If you decide to go this route, choose cards that don’t have a yearly fee to them.
This can be a rather well-rewarding option, but you must be financially practical before you use it. If you sign up for more than one account, you need to sign up at free credit monitoring site (CreditKarma, CreditSesame, etc.) and get your credit report each year.
When you need to borrow money, there’s much more you need to do. You need to be mindful of your credit score and don’t apply for loans unless you’ve got excellent credit.
It’s okay to use the 0% financing options, but be aware that these tend to have expiration dates. If you pay the loan off before the promotional period is up, you don’t have to pay any back interest. Always read the fine print before agreeing to borrow money at a very low rate.
If you want to borrow money for a vehicle loan or mortgage, you need to make sure the payments fit your budget. It doesn’t matter how great the financing is; if you’re unable to afford it, you’ll do more harm than good to your credit.
Always – above all else – look at your credit report each year. You want to make sure that it’s correct at all times, especially if you’re trying to borrow money at a decent rate.
What You Should Avoid Doing When Establishing Your Credit
It’s all too easy, when establishing your credit, to fall into several traps including but not limited to:
You may try to apply for too much at one time, which can lower your credit score.
When approved, you may be using them all and fall behind on your credit. This will also lower your credit score.
The best approach to establishing credit is to take things slowly. Before you know it, you’ll have excellent credit.